Due diligence is an audit or investigation, which a company of the potential product or investment conducts. It reviews all financial records. It is a final precaution measure one undertakes, before entering into an agreement with another party. You have a set deadline to get out of the contract if your due diligence finds something materially wrong with the business. Because the seller is providing you with private corporate and financial information, be prepared to sign a nondisclosure or confidentiality agreement before receiving the documents.
The seller should provide you with audited financial statements and copies of bank statements for the business checking, savings and investment accounts for the past three years. Ask for copies of credit and loan agreements, notes payable, and any liens that have been filed against the company.
What looks good on paper may not be so impressive when seen in person. Plan to make at least one trip to inspect the business premises. Look at the overall condition of the building inside and out. Bring along a list of the fixed assets and equipment, inventory and supplies, office furniture, and fixtures the business owns. Verify that what’s on the list is physically there, functioning, and in good condition. Be sure to get copies of current business licenses and operating permits.
Employee wages and benefits are substantial business expenses. Along with monthly payroll information, you’ll want to know about employer-sponsored retirement plans, health insurance benefits, and employee vacation and leave policies. Determine if there are any employment agreements or contracts in force. The employee handbook should be current and in compliance with federal and state employment laws. Verify the identity of key employees along with their payment and benefits package.
If sales or services are the lifeblood of the business, you’ll want to know how many products or services the business provides along with how the selling price is determined. You need to know how the products and services stack up against the competitors. Ask the seller how he sets his products or services apart from his competitors to attract and retain customers.