Due diligence is the process of analyzing a business before buying it, so there are no surprises after the investment is made. There is no general checklist to follow, as the areas worth critiquing will depend upon the type of business. There are, however, basic principles to follow for any sale.

Efficiency
Performing due diligence should be an extensive process. Because it is time-consuming by definition, efficiency is a primary concern.

When evaluating a business, there are many factors that may be irrelevant to the decision to purchase. After a new business owner takes control, changes are likely to be made. The significant details are those that will continue under the new management.

For example, historical data is only useful to the degree that it will affect the future. Longstanding customer relationships will certainly affect revenue if they remain loyal to the business. However, periods of lackluster (or impressive) revenue caused by unique circumstances may not be realistic indicators of expected future profits.

Preparation
When meeting with advisors to discuss transaction details, all parties should already have thorough knowledge of the business details at hand. Adequate preparation on all sides is necessary for alignment between everyone involved.

Before arranging a meeting, be sure each participant will be delivering enough new information to warrant the time of others. Effective time management is critical to successfully guide these sorts of business proceedings, so meetings should be as organized as possible. Arrive well-versed in any relevant matters to make the most of your advisors’ time and be prepared to simplify any areas of confusion between your advisors and the seller.

Accounting
Many small business owners decide against hiring a professional CPA as a means of cutting costs. Even if the owner is indeed a certified accountant, such a mistake is analogous to a lawyer providing their own representation when standing trial in court. It is a highly risky and potentially disastrous way to save a quick buck, and even more absurd if a CPA would actually increase revenue by saving the owner grueling hours and effort.
 
A qualified CPA – and not just any level of accountant – is prized not only for their knowledge but their experience. They must know how to scrutinize every financial component of the business in question and avoid common mistakes. Above all, they need to have an understanding of small business. Their broad duty is to provide an unbiased comprehensive analysis from an outside observer.

Legal Consultation
Similarly, hiring an established attorney is necessary for many reasons. First and foremost, they have access to resources to help determine the legitimacy of the business. They can perform a proper lien search to discover if the business is keeping any legal complications hidden from public records. If there are any lingering issues, this is the time to identify them before a regrettable purchase is finalized.

Despite their hiring expense, a lawyer with small business expertise can save a tremendous amount of money. Their knowledge of the legal landscape can help correctly value the business and favorably navigate the negotiation process. They can also minimize taxes and other expenses by finding the most profitable way of organizing the business and its transactions.

Timing
Time management can be the deciding factor in closing a deal, let alone knowing if a deal is worth closing. When the inquiry officially begins, the current business owner may require a confidentiality agreement be signed so that intimate details are not made public. The document may impose a time limit to gather information and reach a decision.

Aside from explicit time constraints, a drawn out speculative process can be fatiguing to the seller and drain enthusiasm. Lagging purchase decisions and unnecessary fact collecting can even appear offensive. Ample time can allow competing offers to emerge, and the seller may be eager to accept if the opposing buyers are more assertive.

The due diligence process is lengthy and sometimes even exhausting, but it is imperative that it is done right. A rushed decision can have costly consequences in the long term. Remember the reason it is being carried out in the first place, which is to acquire a business with a bright outlook.

---

Al Fialkovich is the Managing Director at Transworld Business Advisors, a boutique merger and acquisition firm helping visionary entrepreneurs buy and sell companies.  He has been involved in transactional work for the past 12 years, selling three of his own companies in multiple industries as well as working in various CFO roles.  Al graduated Bentley University in Massachusetts.  He enjoys hiking, camping, skiing, traveling, cooking and collecting wine.  Al lives in Denver, CO with his wife Jessica and dog Sailor.