Should I conduct due diligence?

You shouldn’t buy a home without having a home inspection. And you shouldn’t buy a business without doing due diligence.

The due diligence process is where a potential buyer and their team – which typically consists of a lawyer, accountant and banker – perform in-depth research on a company to evaluate its financial and operational soundness and its potential for future growth. When approached correctly, the due diligence process will identify any problems that a preliminary evaluation of the business may have missed, particularly in these four key areas:

Finance: The buyer and their accountant should examine the company’s audited financial statements, tax returns and credit report. These documents will shed light on the business’ cash flow and profit margins – two of the most important factors in operating a successful company.

General company information: Lists of employees, customers and partners provide valuable insight into the people who make the business run. And the business plan, marketing plan and operations manual explain in detail the processes that drive the company forward.

Assets: A buyer needs to know about all the physical assets, real estate and intellectual property the business owns in order to come up with a proper valuation. Make sure any sale agreement explicitly spells out which assets will and will not be included as part of the deal.

Legal and regulatory issues: The current owner should disclose any past or current litigation the business is involved in, so the buyer and their attorney can properly assess their risk. The buyer and their attorney should also investigate the business’ compliance with all local, state and federal regulations.