Before you buy a business, no matter how attractive the seller makes it seem, you and your advisors should carry out due diligence.
This is the method by which you get access to all the company’s files, records, information and personnel to confirm that everything you’ve been told by the seller is accurate.
It also helps determine that it is worth the price you’re being asked to pay, and that it’s free from contingent or unknown liabilities and is capable of continuing to trade.
It pays to have several deals bubbling at the same time rather than just one. That’s because the Due Diligence process is often long. It’s also the point at which deals fall through. It often changes the deal because you discover things that the seller might have hidden or glossed over.
When you buy a business sellers and brokers will pressure you to conduct the Due Diligence quickly, but don’t be rushed. You’ll probably need at least 20 business days to carry out a thorough investigation.
The Due Diligence Process
It’s generally carried out in the following three areas:
- Legal due diligence (carried out by your solicitors). A request is sent to the seller’s solicitors for information and documentation. Eventually, your solicitors will prepare a legal due diligence report for you. It will explain the legal position of the business and areas of concern, and it will provide recommendations that you may need to address post completion.
- Financial and tax due diligence (carried out by your accountants). The purpose of this is primarily to discover the business’ financial and tax risks; to analyse its past profitability and cash flow and its future operational prospects; and to determine its assets and liabilities, internal control and operations management.
- Commercial due diligence (carried out by you or an advisor). It provides you with an in-depth report of the company and its market. It analyses the company’s performance, how likely it is to meet its targets and highlights possible risks associated with its purchase.
Due Diligence Checklist
The Due Diligence will investigate the following aspects of the company:
- Website and domain;
- Trademarks and Intellectual Property (IP);
- Marketing materials;
- Customer contracts;
- Database; and
- Owned premises.
- Non-Compete Clauses;
- Risk scenarios and level of protection.
- Historic debt;
- Looming payments (especially HMRC); and
- Long-term contracts including vehicles and leased premises.
The Due Diligence process should be conducted by a professional on your behalf – never do it yourself!