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What should due diligence look for in business purchases?

| Apr 15, 2020 | B2B Commercial Law, B2B Commercial Litigation |

You may have discovered a company that you want to buy. The company owner has agreed to sell the operation to you. As part of a business purchase, merger or acquisition, a buyer usually conducts due diligence on the company before making the purchase final. This is to help protect you against buying a business that has problems you do not know about. 

Due diligence involves examining many aspects of a business. While due diligence may vary depending on the circumstances involved, an examination of a company usually involves looking at similar factors. Chron provides an overview of what due diligence should look for in a company. 

Cash flow 

You might believe the company possesses a healthy cash flow. Nonetheless, you should use due diligence to ensure that the company is financially fit by checking out income statements and cash flow statements. A cash flow statement confirms where the company receives its money, and an income statement reveals if the company earned any profits. Examining the company balance sheets should tell you how the company has distributed its liabilities, capital, and assets. 

Assets 

One reason people buy a business is because of the assets owned by the business. Due diligence should ensure that you not only know exactly what assets the company owns and the value of the assets, but also the status of those assets. If the company has problems with some of its assets, like a lien or a claim on them by a creditor, it might cause you problems, including making you responsible for those outstanding claims. 

Legal documents 

You should also discover if the company you want to buy has any legal or contractual problems. You could end up inheriting those issues, or you might experience a delay in the purchase, or your purchase price may go up. Due diligence should look at the company licenses, tax returns, and permits. You should also examine the existing contracts the company has made with vendors, suppliers and workers to see if you can continue to fulfill those contracts.