What does due diligence entail when buying a business?
So, you’ve decided to take the plunge and purchase an existing business. Congratulations! Before you sign anything, you have the opportunity to research the company to verify that it is a good investment. The generally accepted term for this type of research is due diligence. This is your chance to look under the hood before committing; so make sure you examine every aspect of the business.
The Checklist
The following checklist is general in nature and is not industry specific. When you are performing a due diligence search, speak with a Virginia business attorney to customize the list to fit your needs.
Finances: review balance sheets, tax returns and cash flow statements. When you are looking at the documents, think about profits/losses, timeliness of receivables and payments, and any outstanding debts.
Liens: Perform a judgment lien search as well as a commercial lien search.
Legal Matters: review all agreements with outside vendors including inventory vendors as well as service providers (i.e. marketing, insurance, security), employees and subcontractors, partners, customers, etc. Check the permits and licenses that are required by law to make sure that they have been attained and regularly maintained. Review any current or past litigation to assess potential risk, costs, and damages. During this process, consult an experienced attorney.
Employees and Shareholders: review organizational charts, handbooks, contracts/agreements, benefit plans, confidentiality and non-compete agreements.
General Health: Does the business have growth potential? Are vendors and subcontractors diversified? Are customers happy and continuing relationships? Is social media part of the marketing plan?
Make your own checklist of things that need to be reviewed, and highlight anything that causes concern. Keep in mind that you need to be comfortable with the reason the seller is selling, the asking price, and the future potential of the business. Every business purchase is different and has unique concerns. Contact our office to discuss your specific concerns.
Richmond, Virginia Business Attorney
