Buying a Business – The Detailed Due Diligence

Once the Heads of Terms have been signed, it is time to thoroughly examine the business. This is called the second and more detailed due diligence.

Check the accounts

 - Try to get access to the audited accounts, and do not rely on them entirely if they are more than six months old.

 - Check the size of the bad debts of the business.

Analyse the historical information

  - Check the sales growth, profit margins, overheads and working capital (debtors, creditors, stock and work-in-progress) of the business, and identify if there are any areas of improvement.

  - Are there any inconsistencies?

Financial projections

  - Check these against the accounts and other details you have to see if they tally up.

  - Does the outlook reflect the relevant industry of the business and the economy as a whole?

Check the assets and stocks

  - What are the stock levels? If there is a gradual increase in the levels, then this could be an indicator that there is or will be an issue that needs further exploration.

  - Check the legal ownership of all the key assets, such as any leasehold and freehold property, equipment, vehicles, and intellectual property of the business.

Legal steps that will be required

  - Will the transfer of the business nullify any existing contracts? If so, the relevant parties will need to be contacted and separate negotiations and legal papers will need to be prepared for each of them.

Carry an employee audit, if possible

  - Who are the key employees?

  - Do each of the employees have the skill required for them to carry on their function in the business?

  - How do the employee pay levels compare with the rest of the industry?

  - How do the employees feel about the change of ownership?

  - Will any employees want to leave? Will any employees have to leave?

Contact customers of the business and ask them for their opinions on:

  - their dealings with the business generally

  - what they feel are the good and bad points about the business (this will help identify where there is room for improvement).

Contact suppliers of the business and ask them for their opinions on:

  - their dealings with the business generally

  - do they get paid on time?

 - how does the business compare its competitors?

Complete the legal due diligence

 - Is there any past or present litigation?

  - Check all the contracts the business has with third parties and identify the liabilities owed to each of them.

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