The Importance of Due Diligence Before Buying A Business
Buying an existing business may be more efficient in terms of time and effort than building a business from scratch. However, the purchase process requires a careful assessment. Once the money and assets moved, anything that happens to the acquired business becomes the new owner’s responsibility. In transactions of large sums of money, we certainly do not want any ‘surprise’ to take place. Therefore, it is important to conduct a due diligence.
Due diligence is a process of investigating or auditing a potential product or investment – in this case a business to be acquired – to ascertain the truth of all reported material.
This process is twisted by involving sellers, lawyers and accountants, or third party services. However, it’s better to invest time, effort, and money for this process than to lose more in the future. Some of these things we need to do during due diligence before deciding to buy a business:
- Check the documents that will incur new owner’s responsibilities, for example, sale and purchase agreements, rights to assets, financial statements, tax returns, and so forth.
- Spend some time to talk with the employee and environment.
- If the business has an ongoing lawsuit or has potential lawsuits, seek a lawyer’s help to check the relevant documents.
- Check customer lists to verify that a business does have customers.
Number of check lists above may increase depending on what you want to verify from due diligence. In essence, this process is done to ensure that there is no ‘surprise’ or fraud gap so that both parties, buyer and seller, were not harmed. During the process it is important for us to ensure the materials reported by the seller matches with the facts and conditions in the field. If something does not fit, then it needs to be reassured until all is clear.
Sources:
https://www.investopedia.com/terms/d/duediligence.asp
https://www.thebalance.com/how-due-diligence-is-used-in-a-business-purchase-397778
