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Due Diligence

A business is a purchase that affects your life and finances for many years to come. A good business can provide financial and lifestyle freedom; the wrong business can drain you of money and time as you struggle to make a profit. This is why it’s important to make an informed decision, taking advantage of as much data as possible. A large part of that data comes from the due diligence process.

What is Due Diligence?

Due diligence is the process by which you ensure everything is above board on the sale. You may trust the seller, but you can’t assume that everything they tell you is accurate. Due diligence is where you go through what the seller has said and ask for it to be backed up with evidence.

Due diligence should cover legal and financial matters, customers, operations, products, services, management and employees. Buyers should see paperwork relating to all these areas, generally from the last three years, to see where the trends are.

If possible, remember to check the information provided by the company against other sources. For example, does the information contained in internal financial statements match what was given to the Inland Revenue Department? If it’s different, why?

When Does Due Diligence Occur?

This can differ depending on the type of business and the wishes of both buyer and seller.

Sellers will often not want due diligence to begin without a letter of intent or an offer. They want to be sure that the buyer is serious before sharing confidential documents. A buyer may wish to see documents prior to making an offer to ensure that the price they are offering is fair. If a broker is acting on behalf of the vendor, they may make documents available as the negotiating process progresses while still maintaining confidentiality for the seller.

Buyers should make offers that are dependent on the satisfactory conclusion of due diligence and allow themselves enough time for all the investigation required. In most cases, due diligence is carried out with the help of professionals including accountants, solicitors and business brokers who will need time to analyse the information provided.

The Employee Question

Often a vendor will not wish to inform employees that they are planning to sell, so they will not want buyers to talk with employees during the sale process. Information about employees, including the organisational structure, wages and employee manuals, should be provided as part of due diligence, but in some cases prospective buyers should speak with employees as well.

If you are planning to buy a business like a coffee shop, where workers can be replaced with relative ease, it may not be essential to speak to employees. Although it would be nice if existing employees stayed on, it is unlikely that any departures will truly impact the business.

However, in the case of a business that has a unique product, requires licenses or has employees that are essential to business profits, it is important to speak to these key employees. Buyers should find out if they plan to stay on and if someone else at the company can take over their role. A business that relies so heavily on one person may not be a good investment.

Speaking to employees can also give you an idea of the workplace culture. It is possible to change a workplace culture if it doesn’t match where you would like to work, but it’s good to have an idea of the starting point before choosing to buy a business.

The due diligence process is perhaps the most important part of the buying process. It allows you to look under the hood and reassure yourself that everything is running as it should or allow you to understand where improvements need to be made. Use due diligence to make sure you make the right business decision for you.