By Michael Monnot – www.InfinityBusinessBrokers.com
What is the due diligence phase?
You’ve made an offer on a business you really like, but how do you know if this is really the business for you? The next stage in the business buying process will be crucial in determining if a business meets your goals, and that stage is called due diligence.
There are a few key things that the due diligence process will tell you.
First and foremost, it will help you figure out the reason the current owner is selling. Why is this important? Motivation for selling can tell you a lot about the health of a business. If an owner is just looking to retire, or has a personal reason for selling – then the business is probably in good shape. Some sellers, however, are looking to run away from a business that is moments away from closing its doors – not something a new buyer wants to inherit.
Another key aspect of due diligence is access to records. You will get a chance to look over the last three years of financial statements like tax returns, as well as read any contracts and leases. Access to these records and documents will help you see the business as it actually exists on paper and will help you determine if the numbers the seller has provided are accurate. The business records will also show any intellectual property rights like copyrights and patents that you may be inheriting as a new owner.
The last key thing that due diligence will help you discover is the relationship the business has with the community at large. What are the relationships with vendors that you will be inheriting? What client lists or regular customers will you be serving? Are there any unresolved legal actions pending? By having a chance to look behind the scenes, so to speak, you will be able to make a properly informed decision about proceeding with buying the business.
No business is perfect, so talk with your Business Broker about any issues you uncover and together you can determine if the issue is something that can be resolved.
If you do find something during due diligence that makes you unwilling to move forward with purchasing the business, you have the opportunity to walk away from the deal.
If you find an issue you are willing to work with, but you feel changes the amount you were initially willing to pay for the business, you and your Business Broker will have the opportunity to renegotiate the terms of your deal with the seller.
Due diligence is your best chance to uncover any unpleasant surprises long before you’ve bought a business with hidden issues, so use your time wisely. Work together with your Business Broker and you will be able to make an informed decision on your future business.
Do you have questions about the business buying process or about the due diligence phase in particular? Feel free to ask us! Please leave a comment or question here, and we will be happy to assist you.
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