A Brief Introduction to Due Diligence

Imagine you are buying a house. The owners tell you that they are interested in selling because they are close to retirement and want to downsize to an apartment in the city. They also assure you that, other than a few minor cosmetic repairs, the house is in great condition. Would you, or any other home buyer, simply take the owners’ word that the house will be a great investment for you?

Of course not! You would do your own research on the property, as well as contact a professional such as a home inspector, to ensure that there weren’t any nasty surprises lurking beneath the surface. If you do this for your home purchase, why wouldn’t you do so for your business? And yet a surprising number of people buying businesses fail to complete the necessary steps to ensure that the company they are purchasing is as sound and profitable as the current owners claim.

Due diligence in relation to buying a business is when the potential buyer thoroughly investigates the business. Its operations, profits, accounting, and workforce—these are some examples of the areas of the business that can and should be subjected to due diligence.

One of the benefits of completing your due diligence before purchasing a business is that you are able to obtain a clearer picture of the health of the business while ensuring that information that would prevent you from purchasing the business comes to light. A business seller, for example, could tell you that the business always makes a profit and the reason for sale is the death of another owner. However, on closer inspection, it could be possible that the real reason the seller is getting rid of the business is that it has consistently lost money over the last few years. Knowing the truth ahead of time could save you from purchasing a “black hole” business—one that will consume your resources, energy, and money without a future payoff.

Another way that your due diligence can help you make the right purchasing decision is that it reveals the status of the company’s books. A close inspection of the debits and credits in the accounting records could reveal modified figures designed to make the business more attractive to buyers. Worse, you may discover that the business owes a large amount of debt to suppliers, distributors, or even the IRS. Completing due diligence on a business’s accounting records and practices can give you a clearer picture of the profitability of the company and ensure that you aren’t “inheriting” a large amount of debt with the purchase.

Due diligence gives you the reliable and verified information you need to make a smart purchasing choice. Before you sink thousands, or even millions, into a business, consult a qualified attorney who can help you navigate both the due diligence and purchasing processes.

Representing Business Owners and Veterans for 25 Years

At Wilson Law Group, PLC, we understand that buying a business is a big decision. To learn more about our services and how due diligence affects purchasing decisions, please contact our office at (804) 864-5268 or visit us online at www.wilsonlawgroup.net. We are proud to offer reduced fees for veterans, as well as a free consultation for all potential clients.

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Wilson Law Group

Jim Wilson is the founder and principal attorney of the Wilson Law Group. For the past 25 years he has been combining legal dexterity with an entrepreneurial mindset to help aspiring and established business owners start, finance, buy, sell, and run their companies.

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