Due Diligence is Essential When Buying a Business

Considering buying a business?

A crystal ball would come in handy, but the next best thing is a thorough look into the past performance of the business. Don’t be afraid to kick those proverbial tires, as you ferret out the facts on cash flow, revenue and reputation.

In truth, exercising due diligence is the only way to ensure a buyer knows the actual worth of the business. A lot of factors go into assessing not only current worth, but also what the firm’s value may be a year or two down the road.

Here are a few questions you should pose before sealing the deal:

Is the business on a steady trajectory? Nothing speaks more clearly than sales figures. Make sure you have reliable data in hand ideally from a third-party. If there has been a recent dip in revenue, dig a little deeper. Or, conversely if there has been a spike in sales, find out if it’s the result of heavy discounting or an actual increase in demand for goods or services. Ferreting out the truth is particularly important when considering buying a seasonal business.

What’s the competitive landscape? Assess the number of close competitors and factor in current trends in merchandising at the local level. Consumers are very sensitive to the first signs that a business district is in a state of decline.

Are there issues over a firm’s reputation that could hold back sales? It’s a good idea to do a little snooping and get a feel for the growth potential of the business. One locale can differ vastly from another just a few blocks away. Ensure the “the marketing machine” is lining up with expected sales revenue.

Has the company been involved in past litigation? If so, local residents may be in the know, while the prospective buyer is oblivious to what people actually think of the business. That can be a huge pitfall. Tapping the expertise of a business valuation expert often reveals those aspects of the operation that a buyer may miss.

Acquiring a business is a great way to transition to a more preferable clime. Just make sure you’ve uncovered the essential factors that impact the value of the business you’re considering, before you sign the papers.

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