How to Conduct Due Diligence When Buying a Business
Hire professionals skilled in analyzing businesses to help you with the due diligence process., Gather documents about the company's business structure and practices., Inventory all physical assets prior to buying a business., Review all contracts...
Step-by-Step Guide
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Step 1: Hire professionals skilled in analyzing businesses to help you with the due diligence process.
An attorney who specializes in mergers and acquisitions should be familiar with the process of buying a business.
You can often find these lawyers listed as M&A attorneys.
A forensic accountant has the auditing and investigative skills to dig deep into the company's financial records and uncover any irregularities.
Look for a specialist in acquisition due diligence when you buy a business. -
Step 2: Gather documents about the company's business structure and practices.
The company's organizational documents should include articles of incorporation, bylaws, names of board members, board meeting minutes, names of shareholders, a list of all the states and countries where the company does business and an organization chart.
Your forensic accountant needs the annual reports, tax filings, a profit and loss statement, the general ledger, accounts payable and receivable and reports of assets and liabilities in order to complete the due diligence process.
Check if the business is collecting its account receivable and paying its debts timely, how much bad debt it writes off each year and does it have any outstanding liens.
Determine whether the business is structured properly for growth or it needs to be changed.
Include mortgages, deeds, leases and other assets or liabilities that may affect your decision to buy a business.
Request copies of all licenses, permits and letters of consent.
As part of your due diligence, read articles and press releases about the company. , You want to know the value of all assets so you can determine the appropriate price to pay for the company.
Physical assets include real estate, manufacturing equipment, office equipment and supplies, inventory on the shelf and raw materials.
Review whether the company has adequate inventory or necessary infrastructure for growth.
Determine whether the company's supplier and customer base is diversified and the business is not excessively dependent on one supplier. , When you buy a business, you may have to fulfill contractual agreements signed before you purchased the business.
You and your attorney should look at installment agreements, labor contracts and purchase contracts.
Ask the seller to provide a list of attorneys, accountants, consultants and other professionals who have worked with the business over the past 3 to 5 years. , Evaluate the employee handbook or term of employment before buying a business.
Give the accountant a list of current salaries, benefits and bonuses for the last 3 to 5 years.
Secure resumes for top-level employees and board members.
The M&A attorney needs to know about any labor disputes or worker's compensation claims.
Due diligence includes an investigation of personnel problems, such as terminations, harassment charges or wrongful termination lawsuits.
Get organizational charts, employment and confidential agreements.
Check whether there are any employee policies that can put the business at risk of any lawsuit. , If the company is involved in any pending litigation, assess what would be the potential risks, damages, and costs., Make sure you understand current coverage and claims before you buy a business. , When you consider buying a business, you want to see all testing data, warranty claims, complaints, regulatory compliance letters, engineering reports, customer feedback and surveys.
Inspect all patents, copyrights, work-for-hire agreements, trade secrets and the company's policy for protecting intellectual property rights. , -
Step 3: Inventory all physical assets prior to buying a business.
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Step 4: Review all contracts with suppliers and subcontractors.
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Step 5: Scrutinize personnel records
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Step 6: including full- and part-time employees
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Step 7: subcontractors and board members.
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Step 8: Acquire the legal documents and history for any pending or threatened litigation.
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Step 9: Examine all insurance policies and insurance claims as part of the due diligence process.
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Step 10: Study existing products and services and those that are under development.
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Step 11: Check out the customer data provided by the seller
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Step 12: including market research
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Step 13: advertising campaigns
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Step 14: sales policies
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Step 15: return policies
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Step 16: credit policies and service agreements before you buy a business.
Detailed Guide
An attorney who specializes in mergers and acquisitions should be familiar with the process of buying a business.
You can often find these lawyers listed as M&A attorneys.
A forensic accountant has the auditing and investigative skills to dig deep into the company's financial records and uncover any irregularities.
Look for a specialist in acquisition due diligence when you buy a business.
The company's organizational documents should include articles of incorporation, bylaws, names of board members, board meeting minutes, names of shareholders, a list of all the states and countries where the company does business and an organization chart.
Your forensic accountant needs the annual reports, tax filings, a profit and loss statement, the general ledger, accounts payable and receivable and reports of assets and liabilities in order to complete the due diligence process.
Check if the business is collecting its account receivable and paying its debts timely, how much bad debt it writes off each year and does it have any outstanding liens.
Determine whether the business is structured properly for growth or it needs to be changed.
Include mortgages, deeds, leases and other assets or liabilities that may affect your decision to buy a business.
Request copies of all licenses, permits and letters of consent.
As part of your due diligence, read articles and press releases about the company. , You want to know the value of all assets so you can determine the appropriate price to pay for the company.
Physical assets include real estate, manufacturing equipment, office equipment and supplies, inventory on the shelf and raw materials.
Review whether the company has adequate inventory or necessary infrastructure for growth.
Determine whether the company's supplier and customer base is diversified and the business is not excessively dependent on one supplier. , When you buy a business, you may have to fulfill contractual agreements signed before you purchased the business.
You and your attorney should look at installment agreements, labor contracts and purchase contracts.
Ask the seller to provide a list of attorneys, accountants, consultants and other professionals who have worked with the business over the past 3 to 5 years. , Evaluate the employee handbook or term of employment before buying a business.
Give the accountant a list of current salaries, benefits and bonuses for the last 3 to 5 years.
Secure resumes for top-level employees and board members.
The M&A attorney needs to know about any labor disputes or worker's compensation claims.
Due diligence includes an investigation of personnel problems, such as terminations, harassment charges or wrongful termination lawsuits.
Get organizational charts, employment and confidential agreements.
Check whether there are any employee policies that can put the business at risk of any lawsuit. , If the company is involved in any pending litigation, assess what would be the potential risks, damages, and costs., Make sure you understand current coverage and claims before you buy a business. , When you consider buying a business, you want to see all testing data, warranty claims, complaints, regulatory compliance letters, engineering reports, customer feedback and surveys.
Inspect all patents, copyrights, work-for-hire agreements, trade secrets and the company's policy for protecting intellectual property rights. ,
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