Planning to buy a specific business to begin your journey into entrepreneurship or to expand your existing company? Before you get ahead of yourself, you need to perform several business due diligent checks. These include information about the business operations, financial risks, legal issues, profits and potential deal breakers, among others.
Before the transaction is completed, thoroughly investigate the business you are interested in buying, which is a practice known as due diligence. The goal of due diligence is to validate the value of the company. It’s also recommended that you secure the services of a business lawyer and an accountant as you conduct due diligence.
The checklist below will guide you in conducting business due diligence before committing to a sales transaction.
1. Financial Due Diligence
Also known as accounting due diligence, this aspect of the business due diligence process looks at the economic health of the business. Check for inconsistencies in the assets, liabilities, and accounts while analyzing their historical trends, projections, and tax risks.
Go through older and quarterly financial information such as balance sheets and income statements. Assess sales, gross profits, and the return rates of the product. Next, break down the business’s inventory to establish its current value.
Look beyond past projections to the owner’s future projections for the business. Ask the business owner to provide the tax details and a summary of all debts, current investors, and shareholders. It’s vital to conduct financial due diligence to avoid making a bad investment decision.
2. Legal Due Diligence
This business due diligence check involves reviewing documents such as the company’s articles of incorporation, bylaws, franchise agreements, material contracts relating to the business, real estate agreements, deeds, use permits and appraisals, lease agreements, and the list of business partners.
It also involves reviewing data on the owners, shareholders, and employees, as well as the percentages held and lists of where the business is authorized to operate. Find out whether there are pending litigations, injunctions, or consent decrees to which the company is a party.
3. Intellectual Property
Intellectual property refers to any exclusive intellectual information owned by the company. This includes copyrights, trademarks, and patents. Review and verify all domestic and foreign patents, the company’s trademark and trade names, and copyrights held by the company.
Also, review the methods used to protect know-how and trade secrets, any work for hire agreements, and all consulting transactions regarding inventions, licenses, and assignments of intellectual property given or received by the company. Also check on all patent clearance documents and any claims made by or against a company regarding intellectual property.
4. Operational Due Diligence
Another business due diligent check is to understand how the company is structured. You should gather all information regarding its competitors, market penetration, and industry trends. Establish what business model the company uses, how large or small its customer base is, the products and services it offers, and what it costs to purchase materials and run operations.
Further, examine the business compliance requirements, policies, procedures, and job functions in the company, the marketing plan used to promote the company’s products, and the production costs and margins, too.
5. Environmental Due Diligence
Every company must protect the environment it operates in. Go through any environmental audits for properties leased by the company, identify any hazardous substances used in the company’s operations, and review the company’s disposal methods.
Request a list of all environmental permits and licenses, together with copies of all correspondence, notices, and files linked to local regulatory agencies. Lastly, obtain a list of all environmental lawsuits and contingent environmental liabilities.
6. Product Due Diligence
As you engage in the transaction, request the business seller to provide you with a breakdown of all existing products or services and those under development. Get information on any report relating to regulatory approvals or disapprovals of any of the company’s products or services, as well as all complaints and warranty claims presented by the company’s customers.
To perform business due diligence, request a summary of results obtained from all tests, evaluations, surveys, studies, and other data concerning existing product and services, including those under development.
7. Human Capital Due Diligence
Human capital has to do with all employees of the company. As someone considering purchasing a business, find out all there is to know about the employees and their positions, resumes, current salaries, and bonuses paid over the last three years. Establish the policies that determine employee benefits, holidays, vacation, and sick leave.
Ask if there are pending labour disputes between the company and any or some of its employees. Look at the worker’s compensation claim history and retirement plans and get copies of all stock options and purchase plans. Remember to inquire whether other employees consult for the organization. Scrutinize any nondisclosure or non-competition agreements between the company and the employees.
8. Customer Information
Know who the company’s customers are and understand their demographics. Find out which segment of your customer base has the highest numbers in terms of sales. Identify what they have purchased over the last three years.
Other business due diligence checks include the customers’ databases, subscriber lists, sales records, purchasing policies, and refund policies. You also need to be briefed on existing customer research data and advertising programs, as well as events used to promote the company’s products and services or reach out to customers.