Buying Guides

Due diligence guide

Buying a Business Guide Image

Once your offer for a business has been accepted it is time to verify the sellers claims by performing an in depth investigation into the viability of the business. You will have to sign a confidentiality agreement to assure the seller that you will not share the information in the unlikely event that you do not proceed with the purchase.

What is due diligence?

In a nutshell due diligence allows you to assess the value of the business and the risk associated with it before completing the purchase.

Entreprenuer.com accurately defines due diligence as:

“A reasonable investigation of a proposed investment deal and of the principals offering it before the transaction is finalised to check out an investment's worthiness; generally performed by the buyer’s solicitor and accountant.”

Although due diligence usually consists largely of the review of financial statements and accounts, you should also ensure that you review the condition of stock (if applicable), all contracts, legal documents and anything that directly effects the running of the business.

Due diligence should always provide you with an accurate view of how the business is currently performing, and how the business will perform following the sale.

When should due diligence start?

As previously mentioned due diligence typically occurs following the acceptance of your offer for a business, however you should start investigating a business as soon as you become interested. Although our account manager John Crayford will always look to obtain key financials from the seller, we recommend obtaining copies of the company accounts by using Companies House WebCHeck service.

What should I investigate?

In your due diligence consider reviewing many of the following areas of the business:

  • Customer contracts and orders
  • Financial statements and accounts
  • Employment contracts
  • Management structure (if applicable)
  • Stock (if applicable)
  • All legal documents
  • All liabilities
  • The reputation of the business with customers, suppliers and local stakeholders

Intelligent due diligence tips

Allow yourself enough time

Due diligence typically takes at least four weeks to complete. So make sure you plan for at least a month of investigation.

Prepare

Have a full lists of all the areas of the business that you need to analyse (see above) before you get started.

Appoint the best people

Make sure that you have your A Team assembled when you are looking to buy a business. You will need an accountant and a solicitor to help assess the financials and ensure that all legal aspects are water tight.

Handling surprises

It is unlikely that you won’t come across at least one aspect of the business that will surprise you. Try to analyse the issues objectively and weigh up whether this is an issue that will seriously affect the running and success of the business in the future. Remember that you can always renegotiate with the seller if you have come across any significant surprises.

See also

Buying a business checklist

Five questions to ask when buying a business