Why Due Diligence is Important Before Buying a Business

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Purchasing a business is a significant expense for most and one that requires careful consideration. It pays to do a bit of research to ensure that you are spending your hard-earned dollars wisely and that the business is going to be a worthwhile investment. Here’s why due diligence is important before purchasing a business.

What does due diligence mean when it comes to buying a business?

Due diligence involves both the buyer and seller having legal and financial representation in most cases to ascertain the facts about the businesses history. While it is possible to purchase a business without going through this process, it is not advisable if you have no prior business sales experience. It could see you forgo thousands of dollars in missed details. Through this process, you can access confidential information about the company which can help you determine whether the business is a viable purchase or not. This data is strictly confidential, and you will have to sign a non-disclosure agreement before they will let you see this information. Due diligence is a vital step when buying a company.

Your team will thoroughly examine the business to ensure that there are no loopholes and work in conjunction with the seller’s party to get you the best outcome from the sale.

When is due diligence conducted?

Due diligence is normally done when the buyer and seller have reached an agreement on a sale price but before either of you have signed the official, legally binding business agreement.

What else do I need to know?

Revenue statements

Due diligence allows you to discover the company’s finances and investigate areas that may be a cause for concern. The finances are meticulously sifted through to make sure that nothing is missed which can cause headaches down the track.

Legalities

Due diligence also gives you the chance to uncover any potential liabilities within the company that can lead to legal problems. It is important that you as a buyer request copies of all documents relating to the business. Your legal representative can analyse every facet of the business including prior sales agreements, litigations, and if there are any lawsuits against the company.

Talk with staff

Most businesses have staff and if you are purchasing a company that has a payroll, you should take the time to speak with them. Speak to employees and management to gather as much inside information about the business as you can. You should ask them:

  1. Of the everyday duties they complete
  2. Any areas they think need improving
  3. If they are paid adequately and on time 
  4. How they feel about the prospect of new owners and whether they would stay on or leave if that was to occur. If the consensus is that most would resign if new management took over, you would need to consider hiring all new staff and training them etc.

Customer information

Without customers, you don’t have much of a business so you must inspect their contacts, contracts, incomings and outcomings. It is also important to establish what kind of service the company provides to its customers. If it is a personalised service and their customers are used to dealing with the one person and the reason they spend money, the chances of them hanging around if they leave or new management takes over is questionable. This provides you with an opportunity to look at ways to keep those loyal customers and if it’s a justifiable purchase.

Know your competitors

If the business isn’t one of a kind, the likelihood of there being similar businesses is high. When buying a company, you need to figure out what its point of difference is, is there anything that makes it stand out from its competitors? Or are the competitors doing something better or more efficiently? Is the current owner implementing similar tactics in the business and they aren’t successful, or they haven’t got equivalent measures in place? This can help you determine whether there are areas for potential growth or problem areas that need work.

Steer clear of sellers who

  1. Refuse to disclose vital information
  2. Will not introduce you to their staff, suppliers, leasing agent etc
  3. Have a poor credit history
  4. Won’t allow you enough time to thoroughly conduct due diligence
  5. Are pushy and trying to rush you
  6. Have legal litigations or lawsuits against them

Additional factors to consider when buying a business

Time frame

Buying a business can sometimes be a lengthy task that requires time not only from your finance and legal team but you also. Once started, you will need to see it through. You should ask yourself if now the right time is to commit to purchasing a business.

Local laws

Make sure you are across local laws and legislations that apply to or impact the running of the business.

Speak with an experienced professional

Before investing a significant amount of money into a business, you must take time to investigate the company extensively to ensure there are no hidden surprises and or unexpected costly outlays. You must take due diligence before committing the purchase because once it is finalised, it is too late. If you are looking for someone to help you conduct due diligence on a business, get in touch with our professional team of sales experts here at Morgan Business Sales . We have extensive experience in due diligence and are happy to help!

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