When you are considering purchasing a business, you will go through the due diligence process. Conducting due diligence means gathering information to verify that a business is financially sound and identifying risks to ensure you are making the correct decision.
The due diligence process allows you to gain insight into a business, how it operates and its employees.
Types of due diligence
There are several types of due diligence. Financial due diligence focuses on a business’s financial performance and verifies the accuracy of financial information.
Legal due diligence examines the legal aspects of the business and legal relationships. Tax due diligence focuses on the business’s tax situation and liability, while operational due diligence investigates how a business operates.
The first step in the due diligence process is to set goals. Know what you are aiming for by conducting due diligence.
Documents, interviews and site visits
Next, examine the financial records, including tax documents. Perform a careful examination of all financial records. Request all necessary documents you will need to make an informed decision and have a thorough understanding of the business’s financial situation.
In addition to reviewing documents, interview management and employees to learn about company culture. Visit the business’s physical location to observe how it conducts its operations and daily business activities.
Review legal documents to make sure the business is complying with its legal obligations. Learning a business is breaching a contract is a major red flag and something you likely want to know about if you are considering purchasing the business.
Identify and evaluate risks
These include financial and operational risks. You should also examine the existing market to determine the impact the purchase will have on your current business.
Once you have reviewed all documents, conducted interviews and spent time at the business, you are ready to calculate a final valuation of the business and make your offer to purchase. There are various valuation methods to use. The right one depends on your situation.