When looking to buy a business, you need to take into account certain considerations. At first glance, you may be overwhelmed by all the matters that require your assessment. Questions like “is this a good investment?” or “are they making money?” are going to be in your mind. But there is a process that you can use to sort out your concerns in an orderly fashion and make an informed decision. This is called due diligence.
What is due diligence?
Due diligence is the process whereby you can investigate and analyse the viability of the business you wish to purchase. By undertaking due diligence, you can look at the business from all angles and make the relevant enquiries to ensure your confidence in making the purchase.
Due diligence is usually undertaken after an offer has been made but no formal agreement has yet been signed.
What is involved?
Due diligence involves a consideration of the legal, financial and commercial matters of the business you are looking to buy. It can be quite lengthy and, at times, a dull process but if you want answers, this is the way to do it.
Depending on the size of the business you wish to purchase, you may want to look at hiring a professional accountant or legal advisor to undertake due diligence.
From the outset, you’ll want to know whether the owner selling the business is in fact the ‘real’ owner. For this, you need to undertake a legal check with business title documents and the contracts under which the company is currently trading. You may also want to check whether there are any outstanding legal matters with the business. Every business is going to have some form of legal conflict at some point; however, walking into a business without knowing of the issues may really blindside you. At least by informing yourself of the relevant legal issues, you’ll be able to make an informed decision about the purchase.
Financial matters is another area that you want to be well-versed about before entering into any binding agreement. You can ask the owner to provide you with balance sheets, profit statements and other financial documents so that you’ll be able to make your own assessment of the viability of the business. Confirm whether all the facts provided by the owner at the preliminary offer stage are, in fact, true.
You’ll also want to assess the commercial trading environment and landscape of the business. In doing this, it will be useful to first have an idea of the potential competition as well as the types of suppliers and clients the business deals with. You would have had some idea of the commercial landscape prior to making an offer to the owner, but with the due diligence process, it gives you a chance to take a closer look at the contractual arrangements and processes of the company.
What if the owner doesn’t want to give me information?
An effective due diligence hinges on the potential buyer making requests and the owner providing the information. A lot of the information you ask for at this stage may in fact be confidential and the owner may not want to provide it in case it falls into the wrong hands. However, if the owner is being uncooperative, you can offer to sign a non-disclosure agreement. This agreement is essentially a confidentiality agreement and provides an overview of how confidential information will be used by the buyer.
Buying a business is an exciting time, but don’t forget to be sensible. The due diligence process can be a valuable tool to analyse the potential future of a business. By using this tool, you can make an informed decision to purchase with confidence and surety.