Due Diligence When Buying a Business: What Does it Entail?

Let’s say that you are buying a company, or an already existing business. You’re probably savvy enough to know already, that you need to do your due diligence. And you may even know what due diligence is.

But what does due diligence actually entail—that is, when you do your due diligence, what are you actually looking for, what kinds of questions should you ask, and what kind of documents should you examine (beyond asking about possible lawsuits or claims against the company, which many people already know to ask for)?

Sales and revenue – This is the most obvious category. You want to know what the company’s sales figures were, as well as what their revenue was, and what they are projected to be going into the future.

Remember that going into the future, external factors like trends, inflation, or the rising or falling of certain industries, needs to be considered. And yes, you can and should ask for documentation of revenue and sales figures.

Accounts receivable – Is there money that is owed to the business? Is this money that is expected to come in as a matter of routine, or is it money that is due and outstanding, and likely, not going to be paid (at least in the absence of legal action)?

And if legal action is necessary to collect monies owed to the business, are the accounts receivable legally collectable—for example, are they outside of the statute of limitations, or is there a lack of documentation, that would prevent you from being able to successfully sue and collect accounts receivable?

Intellectual property – Often, the slogans, designs, or logos that a company uses, are the lifeblood of the business’ ability to promote itself. That’s aside from any inventions that the company may use or rely on, that may be patentable. Always make sure you check to ensure that intellectual property is registered by, and owned by, the seller.

Corporate documents – You will want to investigate and review every corporate document that you can. This isn’t just bylaws or articles or incorporation—it can also include corporate resolutions, policies and procedures, or minutes from meetings. It also can include proof of ownership of any fictitious names the company is or has used.

Organizational charts and lists of directors and shareholders also need to be reviewed by a potential buyer.

Contracts – Any contract the company has with any other outside vendor, contractor, supplier, or any other company or person providing any service or product, needs to be reviewed. Additionally, internal contracts the company uses with its own employees, like nondisclosure agreements or confidentiality agreements, should also be reviewed.

You should review these documents for content—you don’t want to buy a business that is a party to contracts you can’t or don’t want to comply with—but also to see if the contracts that you do want to stay in place, will legally transfer to you when and if you were to compete the purchase.

Buying a business or assets of a business? Call the West Palm Beach business law attorneys at Pike & Lustig today for help.

Source:

bizbuysell.com/learning-center/article/due-diligence-checklist-what-to-verify-before-buying-a-business/