Why is “Due Diligence” Crucial When Buying a Business?

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BUYERS NEED TO KNOW

Exactly What is “Due Diligence”?

“Due diligence” refers to the verification and  information gathering process whereby a buyer seeks to validate their decision to buy a business.  This step occurs prior to the actual closing of the sale.  This is a crucial step in that the information gained in the process helps the buyer verify financials, review the quality and accuracy of revenues and ensures that the company’s past and potential opportunity for growth syncs up with what the buyer’s expectations are or what were set forth in the Letter of Intent (LOI). Small business owners can typically expect this process to last anywhere from 2 to 4 weeks on the average.

Depending upon the particular business, the acquirer may seek information, request documentation and conduct interviews pertaining to a variety of concerns during the Due Diligence process.  Primary items of concern may include, among other things:

  • management bios;
  • financial statements;
  • business/corporate records;
  • financing in place;
  • existing key contracts;
  • customer base information;
  • sales forecasts;
  • marketing and sales materials;
  • operations processes and programs;
  • employee information;
  • intellectual property;
  • tax information and legal documents

How To Conduct  Due Diligence.

When conducting Due Diligence, the buyer is looking for any information to shed light on any possible liabilities that they could potentially assume upon purchase. The existence of such liabilities could significantly alter the valuation placed on the company by the parties and require a re-evaluation prior to closing.

Apart from evaluating liabilities, buyers will also analyze opportunities for future business revenue to ensure the value they have placed on the company’s potential earnings is accurate.  Many would-be buyers are looking for insight to help ensure that the company’s business operations, personnel and processes would provide a good fit with their own organization.

Let Lighthouse Legal Services help you through the Due Diligence process or in connection with the purchase of a business. Contact us at 949-453-7979 or click here to request a call.