How to Conduct Due Diligence When Buying a Business

Many people choose to buy an existing business as it gives you a chance to test your skills without going through the arduous process of starting a business.

However, this doesn’t mean there aren’t processes you must go through when buying a business. While you may skip the stressful early stages, you’ll still need to make sure the business you’re buying is all it says it is on paper.

But what kind of due diligence do you even need to do before buying an existing business?

Below, we’ve gone into detail about due diligence, how to conduct it, and how it will benefit you in the long run. Take a look now to learn more about buying a business!

What is Due Diligence?

Due diligence is pretty straightforward when it comes to buying a business. It mostly consists of reviewing all the documentation that the previous owner has provided you. As a seller, they’ll need to supply information regarding finances, suppliers, employees, equipment, and much more.

This process happens prior to entering into the sale agreement, and for good reason. It’s the perfect time to ensure everything is as it should be. You can assess your risks and liabilities in buying the business at this stage, before actually purchasing it.

If there are things that jump out at you during this period, for instance, information that makes you think the risk of buying the business is greater than initially estimated, this is also your opportunity to go back to the drawing board and renegotiate your purchase agreement to mitigate this risk.

How to Conduct Due Diligence When Buying a Business

Before beginning any due diligence, it’s worth assessing the situation first. Ask yourself if you can do the due diligence, or if you should consider consulting an expert. Working with an accountant, a mergers and acquisitions lawyer, or even a business broker will give you additional expertise in the matter.

They can assist you as you assess all aspects of the business, including reviewing business records, assessing the risks and liabilities that exist, and even offering advice when it is needed.

Whether you work with experts or not, the due diligence process is going to look something like the following:

1. Documentation Request

This stage is fairly simple. You, or your team, will request documentation from the seller. This will include asking for business records (including financial statements, contracts, and more) as well as any additional questions you have about the business that you want answered before you purchase it.

2. Documentation Arrives

In days gone by, you may have received all this documentation in cardboard boxes that took over any office space you have. Fortunately, in the digital age, there are many ways that you can receive this information virtually.

Some sellers choose to use spaces like DropBox or Google Drive, and on selling platforms, like Eden Exchange, where members are provided with a safe and secure place to transfer documentation before a sale. This makes the whole process far more secure.

3. Request for Information (RFI)

The RFI process is essentially includes asking for additional materials that you either didn’t know you needed or were left out of the original documentation request. Again, this process is often done virtually.

4. RFI Responses

From here, the seller will offer any responses to questions giving your team the time to assess any key concerns they may have about the documentation that has been provided. They may also offer any solutions that they have in mind to address any concerns.

Remember that the due diligence stage is about assessing your risk in purchasing. Much of the work done is finding a way to reduce this risk, whether by renegotiating your contract or choosing not to purchase the business at all.

5. Due Diligence Reports

Now that everything has been given to you, you and your team have the opportunity to formulate reports and assess all the information. The reports you generate in this stage are central to making an informed decision about your business purchase.

6. To Purchase or Not To Purchase

The final stage of any due diligence is to simply decide whether or not you want to purchase the business in question. There are a few outcomes at this stage which are as follows.

• You meet the sellers asking price
• You want to negotiate a reduced price due to the information given
• You decide the business is too much of a risk and don’t proceed with the purchase

What Are The Benefits of Buying an Existing Business?

If you’re looking to get into running your own business, there are quite a few options. You could start your own business, become a franchisee, or even buy an existing business. But what are the benefits of choosing this third option?

• Finances: When you start your own business, you somehow have to come up with money to fund it. This could include loans, grants, or investors. If you’re buying an already established business then you don’t need to worry about start-up costs. In fact, the revenue income from the business can cover any changes you want to make, making it easier financially.
• Customers: An established business has a customer base already. This means you don’t need to spend time and money creating one. Instead, you can focus on ensuring loyalty and gaining new customers with the revenue brought in by the existing ones. It also gives you a sounding board for new products. If your existing customers respond well then you know you’re making the right decision.
• Supply chain: One of the biggest areas that new businesses struggle with is finding supplies and building a seamless supply chain. If the business you’re buying already has this process down to a tee, then you don’t have anything to worry about.
• Employees: Finding new employees can be difficult in a new business. People may not want to take the chance on your business working out, but with an existing business, you already have a fully trained workforce. This also means that when you take over, you have people who already know what’s going on and who can support you.
• Marketing: When buying an established business, you’re going to find an already established brand too. Branding is an important aspect of any business, but if you don’t have the flair for marketing it can be quite difficult to achieve. With an already-established personal brand, you can continue the success of the previous owner by using their blueprints.

Final Thoughts

Buying a business is a long-term investment that is always going to come with some risks. Doing your due diligence and ensuring you’re aware of any liability and risk you’re taking on is paramount before you agree to the purchase.

If you’re looking to buy an established business and want a platform where you can securely share documentation, then look no further than Eden Exchange. We’re your one-stop shop for buying and selling businesses and we can support you through the entire process. Get in touch now to find out more!