The importance of due diligence when buying a business

| Jun 23, 2021 | Business Law |

If you buy a second-hand car, failing to carry out the necessary checks could leave you with a money pit. The same applies when purchasing a company; only the stakes are much higher. 

However much you trust the seller, you need to do a thorough revision. Not everyone is as honest as you think, and sometimes an honest seller does not realize the truth about the situation their company is in. Carrying out due diligence minimizes the risk of problems. 

Check what comes as part of the package when buying a business 

You want to buy a restaurant. The owner advertises it as an up and running business with an established clientele and loyal staff. Look at who the clientele is and if they fit your idea for the company. A bunch of regulars who spend $5 to sit with a coffee and croissant all morning will not make you much money. A group of businesspeople who each come for an extended lunch twice a week might.  

If the company comes with employees, you need to find out more about their quality and commitment. Not everyone will appreciate a change in ownership, and a poor staff may be part of the reason the current owner is selling. Even if the staff are fantastic, you need to be sure they are staying. If the current owner sets up elsewhere, they may poach their top workers a few months down the line. 

Be sure you understand the company’s finances. What seems like a successful business may have hidden money problems. You may find a lien on the property they own for unpaid debts. Or you might discover an upcoming lawsuit from a disgruntled former employee. 

 Buying an existing company can be a great option, avoiding the teething hassles a new business would face. However, without performing due diligence, you will be taking a leap of faith that may not pay off.