Due diligence tips when buying a business

[uksme]

Many new business buyers will have heard the phrase 'due diligence', but few know how to carry out due diligence in a comprehensive manner.

We're preparing a checklist of due diligence tasks for anyone looking to buy a new business, and we'd love to know your thoughts.

Have you bought a business recently? If so, what do you wish you had known (and checked) at the time of purchase?

 

[ethical PR]

The obvious ones you haven't included are TUPE and liabilities.

 

[deniser]

It depends on whether you are buying a company or just buying the assets of the business....

 

[uksme]

Thanks for your comments - both good points - we'll take this into consideration

 

[sjbeale]

When taking ons staff beware of TUPE. It is a minefield so you should take legal advice.

 

[Paul_Rosser]

You also need to ensure you cover what happens to any potential tax issues in future.

Had a client recently who purchased a company, all looked good until 6 months later HMRC informed them that due to the previous owners being involved in a tax scheme the company owes them £50k.

 

[Bob]

The list could be endless. Here are a couple more
Why are the vendors selling? Will they be competing with you?

 

[uksme]

These are all really helpful - thanks!

 

[Earplugsprotection]

Recently purchased a business and cast my vote ..... P&L

 

[AmarDigital]

Interesting poll...

Due diligence can be conducted in a host of different ways. The level of detail depends on the size of investment and the associated risks. Six key pillars should form part of the process for due diligence of an internet business:

1. Traffic
2. Financial
3. Owner
4. Operational
5. Technical
6. Legal

I would say the best thing to do is to get a clear audit of what the owner and employees do, how much time they spend on it and what the cost would be to replicate and/or maintain. These are the easiest thing for sellers to misrepresent in a sale.

 

[uksme]

Thanks again everyone - this has been really helpful! We're going to incorporate some of your thoughts into our article.

 

[The Byre]

Remember what Warren Buffet said on this subject - "It's better to buy a good company for a fair price, than a fair company for a good price!"

Nobody, repeat nobody, sells a good company cheaply. You only sell a good company if you see dark clouds on the horizon. You hope that the purchaser will not see those clouds and imagine that the money will just keep rolling in. Just remember EMI - a perfect example. A company centred around a product that was about to become worthless - the CD.

Possible dark clouds - main customer in difficulties; disruptive technology or development coming; main contracts running out; IP running out; key staff wanting to leave; need for massive R&D to maintain position; competitor about to enter the market; legal problems; stock over-valued/out of date; future supply difficulties; I could go on and on!

I am dealing right now with a software company that is struggling - it bought seven companies in as many years that all turned out to be close to worthless. All seven were earning, but software is always a race to the bottom, if you do not invest heavily in R&D and loads of marketing.

Apart from that, it is as Amar stated. Read all the contracts and add up all the numbers.