Buying an Existing Business: A Due Diligence Checklist
Oct 27, 2020 01:04 PM EDT
If you have decided to buy an existing business, you will have a set amount of time to perform a company investigation. As a prospective buyer, you will have a right to request copies of contracts, loan agreements, and additional financial records, which can help you to make an informed decision.
To ensure you don't make a mistake you will later regret, you should read the due diligence checklist below.
A Thorough Review of Financial Information
Purchasing an existing business is a big financial decision, which is why you should not rush the process. If you want to invest in a company that will provide a greater return on your investment, you should perform a thorough review of its financial information.
For example, it's important to review:
Business financials - income statements, balance sheets, cash flow statements, accounts payable and receivable, etc.
Tax returns for the past three years
Records of all business debt - review both their terms and contingent liabilities
Gross profit margin analysis
Fixed and variable expenses analysis
The gross profit and rate of return for every business product
An inventory of all business products, real estate, vehicles, and equipment
To ensure you don't overlook one aspect of a business, you should reach out to an experienced Las Vegas business lawyer who can examine a company's financial performance, liabilities, licensing, and assets, plus more. It will provide peace of mind that you will invest in a strong business that offers great potential.
Learn About the Business Structure and Its Operations
It is also imperative to review the business structure and to identify how it generates a revenue and profit each year. To do so, you should ask for information on market penetration, its competitors, and any industry trends, as this could determine a company's earning potential.
You should also learn more about the brand's customer base, branding, products, services, labor costs, production expenses, and materials.
Request Intellectual Property Information
Intellectual property refers to any copyrights, patents, or trademarks that are owned by the company. For example, it could include products, inventions, unique recipes, technical expertise, or formulas that are unique to the brand and cannot be adopted by another business. Never make assumptions that a brand owns the IP for a unique product, service, or material, as it could result in a company losing its competitive advantage.
Understand Agreements and Obligations
A business might also have entered a partnership or joint venture with one or more organizations. For this reason, you should request information on any obligations and agreements that are currently in place, which you might need to honor when you buy the existing business.
For example, you could review:
Non-disclosure or non-compete agreements
Security agreements or collateral pledges
Contracts, letters of intent, or closing transcripts from mergers
Company purchase orders, quotes, or warranties
Stock purchase agreements
Again, you would be wise to hire a respected business lawyer who can analyze a company with a fine-tooth comb.