Before You Buy: Do Due Diligence!

Before You Buy: Do Due Diligence!

In many situations when you buy a business, whether it is a Stock Purchase or an Asset Purchase, you are given the chance to conduct “Due Diligence.” Due diligence is the process of looking at a business from all relevant aspects before closing the purchase of a business.

Due diligence can protect the buyer in finding any potential hidden liabilities or anything else which may “break the deal.” For the seller, due diligence protects the seller from liability because the buyer was given the chance to investigate the business before the sale is closed.

During this time, the buyer may also find differences between what the seller or the seller’s agent told it and what is actually going on in a business. This may affect the purchase price of the business or may lead the buyer to walk away from the sale.

Some common areas that a seller should look at in due diligence include:

• General company information (Is it active and registered with the proper agencies?).
• Company management and employees (Who is in charge of running the company, are there any employee issues to be aware of?).
• Legal Matters (Are there any lawsuits or legal claims against the business?).
• Products and services (What generates income for the business?).
• Marketing and Competition information (Who are the business’s biggest competitors? What share of the market does the business occupy?).
• Customers (Who is buying the products and services of the business? How satisfied/loyal are these customers?).
• Operations (How efficient are the operations? Are there any areas that need improvement?).
• Financial Matters (What is the financial outlook for the company? Is the company profitable?).

During due diligence process, the following is typically done:

• Examine all records and documents of the business.
• Spend time at the business location to talk to managers, executives, employees and possibly customers.
• Cross reference sales against customer lists to verify that the business actually has the customers identified.
• Evaluate any future plans for expansion, the condition of facilities, equipment, furniture, and fixtures.
• Examine all documents which may incur liability for the company, including sales agreements, purchase agreements, or liens on assets.
• With the assistance of an attorney, examine documents relating to any ongoing or potential lawsuits, and recent litigation that has concluded.

The due diligence process is a critical step when purchasing any business and great care must be taken to do it right. If you do not do due diligence or do not spend time during this process, you may end up buying a business that looked great on the outside but turned out to be a real problem on the inside.

If you would like to learn more about selling or buying a business, please reach out to us at (818)539-2245 or info@brunogroupinc.com