Due diligence is a vital step when buying a business. A thorough review of the target’s financial records, legal issues and market positioning is important to make sure you don’t stumble into a costly post-transaction surprise.
Due diligence can also help you confirm your perception of the target’s value to your business, arrive at an appropriate offer price and structure a favourable transaction. Yet, despite the stakes, many buyers fail to do careful due diligence and end up regretting it later.
“It’s like hiring an inspector when you buy a house,” says Patrick Hagarty, a business acquisition expert and BDC’s Team Lead, Solutions Development, High-Impact Firms. “You can wind up with a nasty surprise if you don’t get a professional home inspection. In the same way, many businesses end up with unexpected financial shortfalls or an unexpectedly costly acquisition because they didn’t do appropriate due diligence.”
Hagarty says due diligence typically involves these four steps.
1. Set out a due diligence process