Due Diligence

When you conduct your due diligence, you should thoroughly look at several aspects of the prospective business. Below is a business due diligence checklist to help you work through that process. * Also, you should strongly consider consulting with an accountant and lawyer to insure you add or remove any necessary steps

Consequences Of Not Doing Your Due Diligence
If you don’t do your due diligence, you will likely make mistakes. The person you are buying from might try to leave out important details or falsify information. Without verifying details, you receive and searching for more information, you might buy a business that isn’t a good financial investment.
Making a bad investment can cause you to lose money on the business and even put you out of business. The business might need a major overhaul. Or, you might inherit an unknown debt or lawsuit.
Also, the business might not fit your existing business goals.

THEREFORE: Conduct a thorough due diligence so you don’t get stuck with a business that has no future.

vHarmony Steps

Due Diligence Checklists

Financial due diligence looks at the economic condition of the business. You’ll look for consistency among accounts, assets, and liabilities. You’ll also look at historical trends, future projections, and any tax risks.

  • Look at past annual and quarterly financial information, including:

  • Review sales and gross profits

  • Look at the accounts receivable.

  • Get a breakdown of the business’s inventory.

    • How much inventory is on hand?
    • What is the value of the current inventory?

  • Make a breakdown of real estate and equipment.

    • List the name, model number, and valuation of all equipment and furniture.
    • Note the size and current market value of land or buildings.
  • Review past financial projections and actual results.

  • Look at the owner’s future projections, including:

    • Quarterly and annual financial projections
    • Projections by product
  • Inquire about the assumptions the owner used to make projections.
  • Get a history of pricing policies and past increases.
  • Ask for all business tax details.
  • Retrieve a summary of debts and their terms.
  • Get a summary of all current investors, if any.
  • Get a summary of all shareholders, if any.

Legal due diligence looks at legal contracts and other related documents for any hidden risks and lawsuits.

Look at all copies of contracts, including:

  • Leases
  • Purchase agreements
  • Distribution agreements
  • Sales contracts
  • Employee and contractor agreements
  • Intellectual property: trademarks, copyrights, trade secrets, and patents
  • Articles of incorporation
  • Business registration documents
  • Operational due diligence investigates the actual operations of the business. Learn the results of past marketing efforts.
  • Research the population demographics of the surrounding area and the business’s target customers.
  • Study the geographic economic outlook.
  • Find out who are the business’s competitors.

Find out how people perceive the business.

  • Learn what customers and potential customers, suppliers, and lenders think about the business.

Research industry trends.

  • Find out if the business’s industry is growing or slowing.

  • Research profit margins for the industry.

Learn more about the business’s competitors.

  • Look at each competitor’s strengths and weaknesses.
  • Compare the competitor’s products, costs, and earnings to those of the business you want to acquire.
  • Determine any threats competitors pose to the business.
  • Find out how much market share each competitor holds, such as the business model, the market, and the competition.

Identify customer patterns.

  • Compare the number of first-time buyers compared to repeat customers.
  • Determine peak purchasing times.
  • Find out what the popular items or services are.
  • Learn what the popular price points are.

Study the business’s marketing.

  • Look at past and current marketing tactics.
  • Review the business’s previous sales and discounts, along with how well any promotions did.

  • Go over how much the business spends on marketing and calculate the ROI (return on investment).

Product due diligence allows you to learn more about the product or service the business provides.

Get a list of all provided products and services. Review the cost to create each product or service.

  • Determine how profitable each product/service is.
  • Look at past and projected growth rates.
  • Investigate what changes have been made to products/services and what future improvements are possible.

Human capital due diligence looks at a business’s staff and management. It will investigate their skills/qualifications.

  • Get an organizational chart.
  • Create a list of current employees, including their positions, earnings, skills, and qualifications.
  • Determine how employee wages compare to wages of people in similar positions in the industry and your geographic region.
  • Get a breakdown of the company’s benefit plans.
  • Learn about the business’s “time off” policies.
  • Get estimates of the business’s projected staffing needs.