Importance of Due Diligence when Buying a Business

Deciding to purchase a business is often a very exciting decision, however, we must remember, it is a business decision and it is important not to let emotions override rational thinking. Prospecting a business for purchase can be a quite confusing and daunting process so we thought we would explain briefly some of the information obtained through Due Diligence and why it’s important.

When undertaking Due Diligence on a business you need to look at the following:

– Assess the historic financial performance of the business by looking at trends in sales growth, profit margins and working capital. Is there scope for improvement?

– Review business forecasts for reasonableness and assumptions made regarding the projections. Do the forecasts tally with historic results and do they appear achievable?

– Understand the existing human capital by identifying any key employees, the skill levels and employee turnover. Would a change in ownership mean employees leave the business?

– Assess the business customers and supplies to determine any risks. If the business lost their largest customer would this have a significant impact of the business operations?

The above is simply a starting point. Throughout the Due Diligence process you thoroughly investigate all aspects of a business for sale. This process can be undertaken partially by the purchaser in conjunction with their Accountant and Solicitor. Due Diligence is the best way to assess the value of the business and the risks associated with buying it.