How to Conduct Due Diligence When Buying a Business

Buying a business is a huge undertaking. Making sure everything is in order entails more than just looking at the financial ledger. Files, records and books that contain all information pertaining to the business and the daily operation of that business should be open for inspection. To conduct due diligence means you will have a specified time period in which to accomplish this.

Instructions

Difficulty: Moderately Challenging

1. Determine an exact time period that you will be allowed to conduct your due diligence inspection before finalizing your contract. When buying a business, this time period is usually 20 to 30 days. Don't be rushed into any less time than you need to conduct a thorough due diligence investigation.
2. Consider asking for help from a lawyer. Advice from other financial and business experts would be wise. The more people you can talk to that have experience in the area of buying a business, the better. Of course, the size and type of business will determine how much expert help you'll need. Buying a small "mom and pop" store versus a corporation will be much different.
3. Examine all basic documents related to the business such as licenses and permits. Make sure that these have been properly applied for and are up to date. Look for partnership agreements. No matter what size business you are buying, you want to make sure you inspect and understand the way it was originally structured legally.
4. Check all mortgages, leases on buildings or any other outstanding loans. Inspect all evidence of outstanding debts. Ask about the inventory records. Are the business assets and liabilities clearly recorded and defined? Have taxes been paid?
5. Examine all the employment contracts and records. Find out the details of company benefits offered. Read the employee manuals. Don't forget to look at union contracts, if applicable.
6. Investigate other similar businesses in the surrounding area. Check out the competition. How has the business you are planning to buy been faring in the industry? Financial status is only part of the big picture. Ask for the reasons why the seller wants to sell the business. Do your best investigating during the due diligence period.