Buying a Business and Conducting Due Diligence

Buying a pre-business can be advantageous but requires careful consideration and research. Prospective buyers should be sure that the business is worth the amount being sold for. Conducting due diligence is a period of time when perspective buyers can investigate and evaluate the depths of a business. As the prospective buyer it is necessary to carry out investigations to ascertain the value of the business, its assets and any obligations to existing staff prior to entering a formal agreement. This period usually begins once the seller and buyer have agreed to deal in principle. Due diligence can be divided into three categories: legal financial and commercial.

Legal due diligence concerns sales and purchase contracts. It is necessary to check that there is no outstanding litigation that the business has the legal title to sell goods and that it owns its assets. Assets include, property therefore subsequent research must be undertaken concerning location, deeds and leases etc, equipment, technology and intellectual property such as trade marks, registered designs and patents. This will assist you in valuing the company.

Financial due diligence pertains to check accounts highlighting inconsistencies or potential existing financial issues. Finances are essential in your research. It is therefore necessary to scrutinize the business’s books and financial records with particular regard to past and projected cash flow, noting particularly relationships with creditors, debtors, suppliers and management.

 Finally commercial due diligence concerns the identification of customer relations , goodwill the business might have attained the relevant marketplace and the regulatory environment. It is important to understand the business in terms of its industry and competitors.

It is advisable to enlist the professional help of an account and solicitor when starting the process of due diligence. Research is fundamental and it is important to uncover as much information as possible, thus it is advised to begin by researching the business on Companies House. Here the buyer can assess information regarding the business such as its latest accounts, returns and company reports. Inevitably it is impossible to learn everything about a company but it is important to learn a sufficient amount to make a clear and informed decision.

At Lawdit we have carried out dozens of due diligence exercises its a must and you must use someone you are comfortable with and trust

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Rachel Pellatt – Southampton Solent University Law Student who works one day a week at Lawdit

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