Buying a business: due diligence

Satisfying the conditions of due diligence

We have successfully negotiated agreement upon an offer to purchase based on the information our business broker and the seller have provided.  This offer included many conditions that we must be satisfied with prior to closing or the offer becomes null and void and our deposit, refunded.

We must now plan and execute a reasonably thorough analysis of the business and the information provided. Our goal is to identify any fatal flaws, verify that the information is reasonably accurate and confirm that this business will really work for us. Professional advisers can help us with this process, called due diligence.

Our business broker will assist us in developing a diligence plan and coordinating its execution, but they will not do the diligence for us. It is our responsibility as the purchaser to do this to our satisfaction. Keep in mind that we will have to work from the existing documentation, whatever records the current owner has.

While we may need the advice of an accountant, we will need the advice of a lawyer. Accountants tend to see diligence from only a financial perspective—we need to address a bigger picture. Our accountant will help us verify cash flow, assets, liabilities, financial history and projections. They will also review tax filings, associated risk, corporate structure and potential tax issues resulting from our purchase. Have them go a step further to review financial control systems and make recommendations we can employ when we take control of the business. We also want to involve them in the preparation of our business plan and financial projections—this may help in securing financing.