How to Buy A Business – Due Diligence is Key

How to Buy A Business – Due Diligence is Key

A task that many business owners approach at the end of the year is the decision to purchase a business. It may be a competitor, a product line you want to add to your business or a group of employees that you want to add.

After you identify the business that you are targeting, the most important thing any acquiring business can do is due diligence. Yes, you need a memorandum of understanding, a non-disclosure agreement, and ultimately a purchase contract. However, it is paramount for the acquiring business to investigate the business operations of the target. Nothing will tell the acquiring business more about what they are buying and nothing will protect the acquiring business more than due diligence.

You should have your professionals ready to assist you during due diligence. You will need someone to help you on the legal side and on the financial side. On the financial side, a CPA will help you determine where finances lead to problem areas and where you can potentially save money when you complete the acquisition. On the legal side, a lawyer can help you identify problem areas in labor relations, supplier issues, and risks posed by prior sales.

In due diligence, at the very least, you should ask for the following items:

  1. Profit and loss reports for the previous three years
  2. Balance sheets for the previous three years
  3. Current accounts receivable
  4. Current accounts payable
  5. Current loans payable
  6. Current loans receivable
  7. Sales reports for the past three years
  8. Reports showing the owner compensation
  9. Tax returns for the previous three years
  10. Vendor/Supplier contracts
  11. Customer contracts
  12. Inventory lists
  13. Employee files
  14. Recipes, formulas, customer lists, etc.
  15. Trademark information
  16. Prior business appraisals

Only after a review of these items and interviews with the current owners can a buyer enter into a purchase contract. Often times, buyers, come to us and ask us to review the contract that they previously negotiated. However, at that point in time, there may not be a whole lot an attorney can do because the risk has not been fully investigated. The contract to purchase should not be drafted until your professionals reviewed and assessed the risks.

Buying a business is stressful. Get your professionals involved early so they can assist you in determining the good purchases from the bad.


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