Due diligence is an important part of any business acquisition. It is the process of gathering information and verifying facts to ensure that the business is a good investment. In this article, we will discuss the importance of due diligence and provide a checklist to help you go through the process.
A Story of Poor Due Diligence
Here is the story of my first business acquisition to illustrate the importance of due diligence. Me and my partners bought a company using a stock purchase and did the due diligence all ourselves.
Unfortunately, we didn't know enough to ask the right questions and ended up with a series of liabilities that we weren't aware of. These liabilities ended up causing us to shut the business down and liquidate everything just to get our money out.
The Due Diligence Checklist
Most people assume that due diligence is about understanding if somebody's lying to them about the financials. However, it is really about reminding the seller of all the different things that you need to know to be able to operate the business.
When going through the financial analysis, there are several "gates" that you need to pass through. You will need to ask for financial statements and look for any contingent liabilities, such as warranties. You will also need to understand the accounting policies and make sure that the bank statements match what's in the accounting system.
In addition to the financial analysis, you will need to look at other areas such as HR, IP, IT, environmental and safety, taxes, legal, and commercial. For example, you will need to make sure that any inventions or special processes are protected. You will also need to make sure that all employee benefits are transferred over if you are doing an asset purchase agreement.
Finally, you will need to make sure that you have access to all the passwords and software. You will also need to make sure that there is no outstanding litigation or any other issues that could cause the assets to get tied up.
Conclusion
Due diligence is an important part of any business acquisition. It is the process of gathering information and verifying facts to ensure that the business is a good investment. It is important to have a due diligence checklist and to make sure that you go through it thoroughly. If you are unsure about something, it is best to ask for help. Doing due diligence properly can help protect your investment and uncover any shady business deals.