Buying a Business: Due Diligence

Buying a business is one of the biggest decisions you will make in life, so you want to be sure you have all the information necessary to make an educated choice. So, what do you need to keep in mind when buying a business?

Create an acquisition plan. This will cover such topics as your timeline, your budget, your team members (other purchasers, professional advisors, etc.), the type of business you want to buy, and the kinds of risks you are comfortable with.

The acquisition plan will help guide you through your due diligence – providing a point of reference as you look more closely at a business you are considering buying.

There are four main questions you need to ask yourself as you go into the due diligence process:

  • Does the purchase make sense?
  • What will be the impact on your current business (if applicable)?
  • Do you know what you’re buying?
  • Are you (and your business, if applicable) ready for the purchase?

The financial state of the business you’re looking to buy is the obvious place to start; as a buyer you will want to see the financial records:

  • Statements and tax returns
  • Budget and projections
  • Breakdown of:
    • Sales
    • Expenses
    • Accounts receivable
    • Accounts payable
    • Profit margins

Involve a qualified accountant in this step. Not only is it wise to have the advice of someone not involved in the sale or purchase, but they will be able to do a deep dive into the books and make sure everything adds up. You want to be sure the business is worth the amount you are looking to pay for it.

You should also verify the legitimacy of the business by looking into the:

  • Strategic plan
  • Incorporation papers
  • Information on the current ownership
  • Organizational chart

Lastly, you will want to be sure you will not become embroiled in any leftover legal issues, for example

  • Any pending lawsuits
  • Issues with employment or supplier contracts
  • Invalid licenses or permits

Another best practice is to look closely at the market and industry. Where is the business positioned? What are the industry and market trends? Look at past and future risks and opportunities to help determine if the business model is sustainable. Once your due diligence is completed, review the terms of the sale and your offer price to ensure you still feel it is a good purchase and a viable investment.