Due Diligence - How to Uncover any Problems Before You Buy

2misi.com

http://www.2misi.com/article/2012/06/how-to-uncover-any-problems-before-you-buy

Due diligence is probably the most critical stage in the buying process. Many prospective buyers incorrectly identify this period as strictly a financial review, but it goes far beyond that. Due diligence encompasses complete investigation and review of the business.

One of the keys to buying a good business, comes from your ability to learn the intimate details of the business. To identify the strengths, weaknesses, pluses, minuses, growth opportunities and areas of concern. If you do not do a flawless job of gathering information, you will not be able to pull the trigger and complete the transaction since you'll be uncertain about too many components of the business.

When to Start the Due Diligence?
 

The investigation process must begin the moment a business becomes of interest. Naturally, your goal is to make certain that you uncover everything about any business before you buy it. You don't have to meet the seller or even visit the business for your research to begin. The Internet is an incredible tool that will allow you to investigate the business, the industry, the competition, the marketing, the suppliers, and on and on.

The importance of beginning your investigation early on cannot be emphasized strongly enough. This way, you'll position yourself to ask the proper questions to the seller. Once you progress to the stage of an accepted offer, you will commence the inspection or financial due diligence. This period usually lasts 10-30 days. This is the time when you'll have access to all of the company's books and records.

A Couple of Things to Keep in Mind

Allow Yourself Enough Time

Many sellers will press for a very short inspection period; sometimes just days. Don't get bullied into this - give yourself ample time to complete this part of the process. You should allow for, negotiate and not settle for less time than you comfortably need to complete a thorough inspection / due diligence period. The financial review can usually be done in days but there is more to investigate and that is why a 20 business day period is not unreasonable for larger businesses, while a 15 day period is needed for smaller ones in order to complete the review and move the deal forward to closing.

Prepare Properly

Since you'll have some time restrictions, provide the seller with a listing of all of the materials required for you and/or your business supervisor to complete this exercise. No matter what you're told, do not begin the process until they have provided what you/your accountant need to properly complete the review.

Dealing With Surprises

You'll probably find some surprises; don't panic, it's normal. Work through them. Get clarification. Build your case. Don't run to the seller every time you find an inconsistency between what you've seen versus what you were told. No business is perfect. The rule to follow is do not treat any incidents as catastrophes or any catastrophes as incidents. If you find a major problem, get your facts in order and you can then decide the appropriate action to be taken with the seller (i.e. renegotiation, walking from the deal, etc.)

If you have not gathered the right information or failed to investigate the business thoroughly, you will not be 100% certain of what to do. And so, you'll drop the project. Conversely, if you do a flawless job of investigating the business, and everything else adds up right, then making the final decision is simply one more step in the process!