An Introductory Summary to Due Diligence for Business Buyers

by | Dec 19, 2024 | Commercial, Signus Legal

An Introductory Summary of Conducting Due Diligence when Buying a Business

Due diligence is when a prospective business buyer gathers as much information as they can before signing the contract to evaluate the business’ potential for profit and how it should be handled.

To make it easier, I have narrowed the due diligence process into three categories that you must conduct.

Financial

Financial due diligence entails, you guessed it, all the financial aspects of running a business. It includes:

  • Assets – items of value that your business owns and produces profit from. Understand what they are, including intellectual property, and what their capacity for growth is.
  • Records – these include income, profit and loss and records, balance sheets, cash flow statements and tax returns.
  • Financial health – what is the market value of the business? Assess its chances of growth, and what you can do to increase that growth.

Legal

Due diligence to stay out of legal trouble.

  • Licenses and permits – research and ensure all licenses and permits specific to your industry are correct and up to date.
  • Contracts – analyse every contract between the business and clients, partners etc. It will be your responsibility after purchase to ensure they are all being met.
  • Liabilities – the opposite of assets, liabilities are what the business owes. To avoid any nasty legal fees, ensure you are aware of any outstanding debts that you will need to pay.

Operational

Operational due diligence focuses on the physical side of things.

  • Building and equipment – is the business site in good condition? Is all the equipment in working order and properly licensed?
  • Efficiency – particularly nowadays where AI can do many things for us, is anything in the business a little old-fashioned and can make your job much easier if upgraded?
  • Employees – ensure you have the correct amount of employees. Too little will not get enough done in a timely manner and too much will mean many staffers will have nothing to do and you won’t be able to afford to pay them.

If you have further questions or are uncertain about how to conduct due diligence for your business, please contact me. I am here to help.

 

 

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