Due diligence and buying a business

Due diligence is a term used to describe the investigations that need to be performed prior to buying a business. These investigations will generally take a while so it is best to allow up to a month for a small business. If you cannot afford this time or it is not available, be sure to negotiate to make sure that the representations of the seller concerning the business are comprehensive and that the agreement allows you to back out of the deal if the due diligence done after signing the agreement is not satisfactory. You might want to employ an accountant and legal (Lawdit) advice.

The investigations are to discover if what you are buying is viable for you. This indicates that you will need to examine the books and to gain access typically you will need to give something in return, such as a down-payment.

The seller should take the business off the market whilst you investigate whether the business works, whether it will work for you, how you can change things, what you need to change. Consider:

The existing and your future employment terms and conditions, if there is any and how serious any outstanding litigation is, what major contracts and orders exist or are in the pipeline and whether they would be affected by a change in ownership, the existing IT systems and other technology and the cost or necessity of upgrading, environmental issues and likely changes in legislation, the current management quality including standards of customer service and consider whether you will be able to improve them, and to what effect, research and development schemes in place and their future implications, and marketing – can you see ways to improve it?

Look at accounts, balance sheets, profit margins, budgets, comparable sector statistics, employee records, payroll records, copies of pension and profit-sharing plans, employment contracts, and any union contracts, board minutes and resolutions, customer lists.

As well as the more general areas above Lawdit can particularly help you in considering intellectual property if relevant unrealised intellectual property assets, licensing and upcoming renewals.

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