What Due Diligence is Needed Before Buying a Business?

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Buying a business is an exciting prospect, but it can quickly become a nightmare if you don’t do the right research before you commit. Due diligence may not sound like fun, but it’s well worth the effort to ensure that your business venture will be a success.

So if you’re looking to buy a business, what type of research should you do? Here are a few things to get you started:

Financial Research

The first step is to dig into the financial documentation of the business. You want to ensure the business is on a solid footing and that all statements are consistent.

Look at annual and quarterly income statements, balance sheets, and cash flow statements. Pay attention to profits and rates of return, and review accounts receivable. You also need to understand the current asset inventory, including land, equipment, and buildings.

Find out how taxes look and get a summary of all current investors. When looking at projections, ask questions about underlying assumptions and make sure they make sense.

Legal Concerns

Aside from finances, you want to review all of the business’s contracts and legal documentation, including leases, employee agreements, and distribution agreements. You’ll also need to review patents, trademarks, and business registrations.

One thing to watch for is patents that are about to expire. If they cannot be renewed—or it will be expensive to do so—that impacts the value of a business significantly.

Operations and Marketing

Finally, you’ll need to review how the business is operating and its position in the marketplace. Who are the key competitors? How is its marketing outreach? Does it have a significant reputation—good or bad—in the community?

Also, take a look at existing products and services and customer demographics. Notice any seasonality in sales and whether the demographic is growing or shrinking.

All of this information is essential if you want to purchase a business wisely.

Get Help With Due Diligence

As you can see—even from this brief overview—due diligence is very complex. It’s easy to miss something.

To avoid that, it’s best to work with a Tampa Bay business broker. A broker will know how to sell and buy a business and can help guide you through your due diligence.

If you’re ready to work with an experienced broker in the Tampa Bay area to buy a business, we’re here to help. Contact us for more information today!