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Tuesday, March 20, 2012

Importance Of Due Diligence In Buying A Business

When planning to buy a business, it is important not to overlook the due diligence process prior to signing the ownership papers. If you were to skip through this activity without much thought you may end up taking possession of a company or franchise which under-performs. No matter whether or not you believe you are getting a good deal, make sure you explore comprehensive due diligence checks prior to transferring the agreed funds to the current owners.

Due diligence usually involves examining the business that you intend to buy from a range of angles so as to ensure that the financial aspects do match the information the seller has given. It's typically the last step that is undertaken prior to preparing closing documents. It is initiated after the seller has agreed on the offer put forth.

To perform the process correctly, there is a requirement to get all financial documents that are available from the seller. These should include lease agreements, employee records, cash flow statements, balance sheets, profit and loss statements, monthly sales and expenses data, and tax statements. The documents should cover a period of at least three years to give an accurate picture of financial health.

When analyzing the data that has been given, there are a number of considerations you should look for. It is these that should give you a clear understanding as to whether the type of potential exists to make the investment a practical one. If you are not so familiar with pulling out data from company records, hire a professional to help you.

Sales and expense trends should be identified. For a company to be healthy, sales should be increasing and expenses decreasing or at least be static. It is important to observe whether there are solid or erratic trends.

If there are any inconsistencies apparent between the documents given, take this as a red flag. For instance, if the number of employees has increased over the last twelve months, but profits have not grown, the current owners should explain why this is. Do not ignore any discrepancy, as it can be an indication of a problem.

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