Due diligence plays a crucial role in any business acquisition
Philip was stressed because he was going to lose another deal. A few months ago, he had wanted to put in an offer to purchase a business but had been slow in getting in his Letter of intent (offer) and been beaten out by someone quicker to the trigger.
Phil had been looking at another business for six weeks now, and an offer had just been submitted by a competitor.
Philip is typical of many prospective business buyers who try to do much of their due diligence in advance of an offer. Due Diligence is a clause specifically designed to enable the buyer to ensure that what the seller is saying about his business or property is correct. It enables you to get into the weeds of the business and do a sophisticated analysis of every aspect of the business that you might have concerns with; these include but are not
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limited to:
- Company Structure
- Asset Lists
- Financials
- Lawsuits and legal status
- Condition of equipment
- Inventory status and quality
- Leases
- Accounts receivable
- Customer lists verification
- Marketing
- Industry
- Supplier agreements and standing orders
- Insurance and requirements
- Licenses and permits
- Good will – how good is it?
- Environmental
- Employees – Who is staying and who isn’t?
- Employee agreements and commitments
- Tax standings
- Contracts and agreements
- Non-compete agreements
A letter of intent allows the prospective buyer to put forward an offer; due diligence then ensures that the value is equal to or greater than the amount offered. It is essential that the due diligence process be structured and each piece of required information be systematically and diligently verified.
While not all risk can be eliminated, the due diligence process gives you time to reduce risk and ensure the company’s ongoing viability for the future benefit of the new ownership.
Philip eventually realized that getting to the offer or Letter of Intent was just the first step in the process of deliberation of value. Performing due diligence allowed Phil to reduce his stress and get to the point where he could put in an offer for a business.
In the end, the due diligence went smoothly, and Phil could go through with the deal, enabling him to achieve his financial goals and create the lifestyle he was looking for.
Dave Fuller, MBA, is an award-winning business coach and a partner with Pivotleader Inc.
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