Performing due diligence prior to closing on a business purchase is actually the most important step in buying a business. Unfortunately, it’s also a step that many small business buyers take haphazardly, or skip altogether. Due diligence usually comes right after the buyer and seller formally agree on the sale of the business, depending on the results of the due diligence review.
These are the things you should include in his due diligence when buying a business:
1.) Accounting. Small businesses are notorious for keeping poor accounting records, so it’s virtually mandatory that you (or preferably an accounting professional) review the company’s accounting records for accuracy and uncover any problems.
2.) Site inspection. Although you have obviously visited the site of the business you are purchasing, now is the time to take a very close look at the physical aspects of the business. She must take a close look at the equipment to make sure it is in good shape and capable of performing the tasks she is planning. She must study the building to make sure there are no surprise repairs that she will be responsible for after she takes possession. And, most importantly, you need to determine the general condition of the workplace. Much can be determined by the way the business has operated in the past: is it well organized, free of clutter, and a good work environment? Don’t skimp on this part of your due diligence.
3.) Employees. If the business has employees, you probably want to retain most of the employees that come with the business to maintain continuity. This can sometimes be a problem, depending on what happened before your involvement. You need to talk to some of the employees and make sure there isn’t an employee revolt simmering below the surface waiting to erupt.
4.) Clients. You need to interview a few key clients to make sure there aren’t any customer relations issues waiting for you when you take over. A problem in this area can indicate significant internal problems in the company, so don’t skip this step.
5.) Vendors. The same goes for the company’s suppliers. You should contact some of the major suppliers to make sure there are no open issues and that the suppliers will be happy to continue doing business with you.
6.) Government. You must ensure that the business has all the necessary licenses and permits to operate. You should be aware of “grandfathered” terms that will change when a new owner takes over. In drastic situations, you may not even be able to operate the business where you are now, due to a code change or other government action that required the business to be grandfathered. A new owner usually breaks the grandfathering consideration.
The purpose of due diligence is to find out if there is something in the operation of the business that could cause you not go ahead with the purchase…as well as to highlight areas you’ll likely need to address shortly after taking over.
Don’t skip or bypass the due diligence process…it could come back to haunt you.