Due Diligence and Buying a Business.
The Merriam-Webster Dictionary defines ‘Due Diligence’ as “research and analysis of a company or organization done in preparation for a business transaction.” Some even consider it a pre-marital background check and counseling. However, it is worth noting that dissolving a merger is much more complex than ending a marriage if things aren’t as they appear.
Ultimately, due diligence ensures that things are as they appear before a business sale is closed. For someone considering a merger or the acquisition of an existing business, reviewing documentation and answering your due diligence questions is critical. There is no doubt that it’s a complex process that can be time-consuming. However, with so much at stake in any merger or acquisition, you don’t want to make a decision without all the information. You want to ensure that everything is reviewed and all questions are answered satisfactorily.
What should be part of the due diligence?
During the due diligence process, the Buyer often asks for a lengthy list of documents. The list of documents should cover a range of areas, including:
- Legal structure and incorporation of the company
- Internal Revenue Service (IRS) records
- Insurance policy information
- Organizational structure
- Personnel policies
- Operations
- Capital and real estate
- Contracts, licenses, agreements, and affiliations
- Technology and Intellectual Property
- Current or potential legal liabilities
- Marketing materials
Today, buyers are emphasizing the due diligence process more than ever. While the financial aspect is key, the due diligence process should also consider organizational items. Be sure to seek documentation and ask essential questions about the company’s culture, strategy, leadership, and competencies.
To adequately address and evaluate all of the areas of the due diligence process, you want to assemble the best possible team of people. Work with that team, including your business intermediary, to review and evaluate the documents and information you receive. It’s also important to keep an open mind. Ensure you get all the necessary information, but don’t assume you will find something wrong.
Although the due diligence process may take considerable time, it’s a critical part of any transaction and should be considered the foundation of the entire deal.
If you have a question about selling or buying your business, give Andrew a call toll-free at (844) 414-9700
This article is reprinted by the International Business Brokers Association® (IBBA). IBBA is the largest international, non-profit association operating exclusively for the benefit of people and firms engaged in business brokerage and mergers and acquisitions. IBBA has 1,950 members worldwide, with its corporate headquarters located in Chicago, Illinois.
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