Failing To Plan Ensures Planning To Fail

The Importance of Due Diligence when Purchasing a Business

There is nothing more critical to purchasing a business than learning everything possible about that business. All too often purchasers get swept away in the wonderful possibilities of purchasing and owning what they perceive to be a thriving business that they fail to take the time to learn all of the intricate details of the business they are seeking to buy. Purchasing a business involves investing both money and time, so conducting a thorough investigation of the business will assist a person in deciding if the business is the right fit for them.

Due diligence is the process by which a prospective purchaser verifies (a) that what is being purchased is what he or she thinks is being purchased and (b) that he or she has the necessary skills to operate the prospective business. Both of these aspects of due diligence are critical for the success of the new venture.

Once a purchaser has targeted a potential business to buy, the due diligence period begins. The purchaser must undertake to explore and analyze the business’ viability, its fit with the buyer’s experience, skills and financial resources. In order for a prospective buyer to get all of the material facts necessary to make a fully informed decision and assessment of the true condition of the business, it is recommended that he or she engage professionals who have extensive experience in the purchasing and selling of businesses. Key professionals include certified public accountants, insurance brokers and business attorneys. The new business owner will need these professionals on an ongoing basis once the business is purchased and it is usually helpful to have them in place at the very beginning of the transaction. These professionals will also know what to look for in a business and will be able to decipher the books and records of a business, even when the owner of the business seeks to hide certain aspects of its financial dealings. A valuable professional will be able to alert a prospective purchaser whether the purchase price is too high, whether the type or condition of the business is what the purchaser thought it to be, whether the company is having financial problems, whether the company is under poor management, whether there are pending lawsuits against the company and whether there are contingent liabilities that are not readily ascertainable by a non-professional.

During the due diligence period the prospective purchaser should review the following:

• Personnel of the business to understand the employees’ skills, experience, wages, payroll procedures and other relevant human resource issues.
• Financial operations of the business by reviewing the company’s books and records as well as all accounting and bookkeeping methods. The purchaser should analyze cash flow, both present and projected; review accounts receivables and payables; understand the company’s debt; and review the company’s price structure.
• Marketing plan to understand the company’s advertising campaigns and public relations programs, if any, to compare this company to its competition.
• Property and equipment by reviewing all leases and conducting appraisals and inspections to insure that the property and equipment have the value anticipated by the purchaser.
• Business operations of the company such as location, inventory, vendors, suppliers, management, customer relations, insurance policies and any other topics specifically related to the business.

It is important that the prospective purchaser not perform the due diligence on his own. Individuals with the knowledge and expertise are invaluable to a purchaser in order to insure that the business being purchased is what the purchaser believes it to be. Additionally it is helpful to have a professional on board in order to make sure that the issues are addressed with objectivity.

Purchasing a business can be a pain-staking process, however, if a purchaser enters the process with eyes wide open and a support systems consisting of trained professionals, the potential reward is unlimited.