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The Due Diligence Process
Buying a small business is a good, fast way to throw away a great deal of your own money, to say nothing of ruining your credit, if you do not know what you are doing. With real estate, it is possible to overpay, but there really is no such thing as getting nothing for something. Even if you overpay somewhat, quality real estate in most markets goes up overtime. A business does not rise in value simply because time passes. With the purchase of a small business, it is possible to simply buy the proverbial “pig in a poke”. Most small business deals do not die in the contract negotiation stage, but in the due diligence stage when the buyer discovers that the seller is lying, or more politely stated, mistaken.
Dishonest people will do almost anything to make a business look better than it is. They will put their own cash into the business’ account to create false revenue; they will fail to disclose a significant increase in competition; they will understate liabilities to vendors and tax authorities; they will fail to disclose impending eminent domain issues. The list is endless.
Unfortunately, for many prospective business buyers their due diligence focuses on the financial aspects of the business such as ascertaining if the assets and liabilities are correctly stated, and whether or not the profit or loss is accurate. This is extremely important, but it is not all there is to due diligence. If you are not an accountant, you should hire one to perform the financial aspect of due diligence.
As regards the other aspects of the due diligence process, below is a check list of items that you can and should perform yourself:
- Do a thorough evaluation of the competitive environment. Visit competitive businesses if possible.
- Check with local political authorities to determine if there are any eminent domain issues.
- Try to speak to some existing customers, WITHOUT divulging confidentiality, to determine if they are satisfied with the products and/or services offered by the business.
- Meet with the landlord to determine if s/he is the type of individual that you want to enter into a long term lease agreement with.
- Do an evaluation of the long term prospects for the business’ products and services.
- Remember, caveat emptor – buyer beware. You cannot afford to make a mistake when buying a business.
This article is not intended to be a rendering of legal, accounting, tax or other professional advice. Assistance from a competent professional in these specific fields should be sought.