When you are buying a business, your Purchase Agreement absolutely MUST have a Due Diligence Clause.
You see you will be making your decision about buying the business based on the representations of the current owner, as well as their Business Broker.
So a Due Diligence is your chance to make sure that everything they have represented to you about the business is true. And it is your chance to dig a little deeper and see if there is anything they haven’t been telling you!
Now we aren’t suggesting most people trying to sell you a business are trying to rip you off. But unfortunately it does happen and you need to do all you can to protect yourself!
Even if they don’t deliberately mean to do the wrong thing, you still need to perform your checks.
You see every business owner will have a better view of their business, and a somewhat inflated opinion of its true value. It is only natural. Usually, they have been involved in it for so long, and they have invested so much of themselves into it, they can’t help but be attached and have slightly less than an objective view of its real worth.
Then there are the business owners who may not actually be particularly good operators. Or at the very least they aren’t fully versed in all their figures and the realities of their business’ performance.
The Due Diligence is your chance to check things out and make sure no one is missing anything.
We perform two forms of Due Diligence.
The first is what is referred to as a “Desktop” Due Diligence. This means we won’t visit the premises and instead will perform a high-level review of documentation provided to us by the current business owner and their Accountant.
A Desktop Due Diligence clearly has its shortcomings, it simply isn’t possible to undertake in-depth analysis and investigations into the business. The purpose of a Desktop Due Diligence is to provide a low to moderate level of confidence about the business, but clearly, there are few assurances able to be provided. It will, however, pick up the most glaring shortcomings if they exist.
The clear benefit of a Desktop Due Diligence is the cost. It will generally be between 25% to 50% of the cost of a Full Due Diligence.
A Full Due Diligence involves time spent on the business premises, in-depth inquiries of the current business owners, inquiries from customers, of suppliers, reviewing of source documentation and transactions. Clearly, it gives the best chance of uncovering any shortcomings. The cost is higher, but the confidence level it can provide, and the losses it may well help you avoid, can make it more than worthwhile. In fact, the return on investment, relative to buying a business that will not be as successful as you hope could be 10, 20 or more times its cost.
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