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How to conduct due diligence when buying a business

How to conduct due diligence when buying a business

examine, investigate, inspector, detective

Before making that business purchase decision, knowing how to perform due diligence is necessary to avoid unforeseen and unpleasant surprises.

A global and dynamic marketplace has made performing due diligence a requirement for any business.

As a business owner, you need to evaluate a business opportunity before making a decision. Doing due diligence helps you verify the accuracy of all available business information and assists in forming an informed assessment on the profitability of the business you are purchasing.

How do business owners conduct due diligence? Here's a list of things to look into:

  • Business reputation
  • Financial information
  • Employee information
  • Business structure, organisation, and operations
  • Physical assets
  • Litigation and legal responsibilities
  • Insurance Coverage
  • Marketing and competition information

To get a clearer picture of the company's structure, organisation, and operations, ask for:

  • articles of incorporation
  • list of all locations (states, cities, and locales) where the company owns or leases property, is authorised to operate the business, and maintains employees
  • three years’ worth of annual reports
  • list of company's assumed names
  • copies of registrations

Another thing a would-be business owner should consider doing due diligence with is the financial status of the business.

Examine the company's financial status by:

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  • checking at least three years’ worth of audited financial statements, together with accountant’s and auditor’s reports
  • looking at recent unaudited statements and comparing previous financial years’  statements to current financial statements
  • looking at business information on capital budgets, strategic plans, and projections
  • checking balance sheets, income statements, cash flow statements, and tax returns

The business’s organisational structure and operations, as well as employee information could also help would-be business owners gauge whether or not buying a business is a good decision.

You need to check the business’:

  • organisational charts
  • employee handbooks and employment agreements
  • wage and salary information
  • benefits plans
  • non-compete agreements and confidentiality agreements

A list of the company’s customers, suppliers, vendors, and their corporate operations manual will assist in developing a new operational strategy, if and when you decide to buy the business.

Other important information that a business owner may need to look into are the following:

  • a list of physical assets, including all fixed assets and their locations
  • current and pending litigation and legal responsibilities, if any (read more on Legal considerations when buying a business)
  • insurance coverage and policies
  • marketing and advertising information, including the company's marketing plan, market analysis, and growth opportunities

Performing due diligence in businesses located in emerging markets must cover a greater scope compared to those located in developed markets as there are numerous factors in advanced markets. These may include, but are certainly not limited to, fast-changing regulations, bureaucracy, and corruption.

Outsourcing due diligence is also an option that is beneficial, especially in emerging markets, where information is limited or even barely available. Having a local who knows the market and its culture better than you do and who will perform menial due diligence tasks could reduce the risk of unpleasant surprises.

Before buying a business, conducting due diligence could help a would-be business owner decide if it is a sound business decision. Just remember though that you can also ask for expert advice before finally deciding to go through with that business purchase to ascertain if the business you are buying is the right fit for you.

How to conduct due diligence when buying a business
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