Due diligence when buying a business | BDC.ca
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Why due diligence is so important when buying a business

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Buying a business is an arduous, yet potentially rewarding process, and can take weeks or months. Because buying a business will involve investing a fair amount of money and time, it is critical to do your homework when gathering information about the business.

In most purchases of small businesses, the buyer will want to learn everything possible about a business before signing the purchase agreement. (Alternatively, if there isn't time to do that, then the buyer will want to make sure that the representations of the seller concerning the business are quite comprehensive and that the definitive agreement allows him to back out of the deal if the due diligence done after signing the definitive agreement is not satisfactory).

In business transactions, the due diligence process varies for different types of companies. The relevant areas of concern may include the financial, legal, labor, tax, IT, environment and market/commercial situation of the company. Other areas include intellectual property, real and personal property, insurance and liability coverage, debt instrument review, employee benefits and labor matters, immigration, and international transactions.

The due diligence process will most likely involve several experts such as: Corporate attorney, you and your investment partners, the management of your company and perhaps outside counsel who specializes in acquisitions (and potentially mergers).

The purpose of due diligence is to gather all of relevant information about the other company so that you are able to craft the best possible deal for your company. In addition, conducting proper due diligence will help you to avoid some of the following problems:

  • Discovering that the purchase price of the business is too high
  • Misunderstandings as to the type and condition of the business being bought
  • Bad financial situations, bad management
  • Pending lawsuits and contingent liabilities, etc.

Note that there is no set amount of time that must pass during due diligence—take as long as you need to answer all of your questions. If you haven't covered them already, you should examine the following areas during the due diligence period: Review personnel, financial operations, marketing and sales strategies, appraisals for all equipment and assets and business operations, etc. Remember, the devil is in the details.

It is also good practice to consult a lawyer during the due diligence stage of buying a company.