Why perform due diligence in the first place?
After all, performing due diligence will cost you a lot of money and time. You had a meeting with the Business Broker and the current owner of the business that you are considering acquiring. They both appear to be honest, law abiding, church going, God fearing individuals who wouldn’t try nor want to beat you.
Right!
You couldn’t be more wrong!
Just because you wouldn’t lie, misrepresent or mislead any potential buyer with respect to a business that you currently owned and were about to sell and that you would deal with the prospective buyer with good intent, does not mean that everyone has your scruples.
Remember that many people believe whole-heartedly in the statement:
"If you don’t ask, and I don’t bring up the subject or inform or advise you, I am not doing anything wrong".
The purpose of performing due diligence is to know exactly what you are buying. The due diligence list that I have included in this manual may give you the initial feeling of “what am I getting into!” Or on the other hand it may appear as if I am presenting a multitude of reasons why you should not consummate the purchase of this or any other business, but this is definitely not the case. The sole purpose of performing due diligence is to ensure that if you do decide to acquire the business in question that there will not be any major negative surprises at anytime in the future. In a lot of cases there are no “Good” or “Bad” or “Right” or “Wrong” answers. The answers to the questions are no more than answers that provide you with additional detailed information and knowledge of the business you are contemplating acquiring. For instance, there is nothing wrong with buying a business that has to be relocated within six months of acquiring it, providing that you are fully aware and prepared for the relocation exercise and that you have taken the associated expenses of the relocation into your cash flow forecast prior to making an offer and subsequently buying the business.
It is very difficult to create one set of definitive due diligence guidelines for each and every business type. There are substantial differences in the due diligence exercise for a local retail ladies apparel store with two employees and a manufacturer of electronic equipment with a 75 employees and a global market. Hence, many of the statements, comments, ideas and suggestions that I make and discuss may be totally irrelevant to the business that you are considering acquiring. I would however recommend that rather than throwing the manual in the trash or using it to prop up a short leg on a table that when you come to areas within the manual that are not relevant that you just skim over them and continue on to the relevant subjects.
I would also like to point out that if you hired a hundred experienced and qualified individuals to aid you in performing the due diligence exercise that they and you would most likely miss something. All you can do is try to mitigate the missing knowledge to something not strategically important to the overall success of the business.
Do not allow yourself to be forced by the Business Broker or the seller into a very short due diligence period. It is very difficult to complete a thorough due diligence of a small business in less that fifteen days and depending on the complexity of the business it can literally take months. If the seller will not give you the time that you feel is required for you to perform all the due diligence checks that you need to feel comfortable then walk away.
Be paranoid, be suspicious and never assume anything!
READ – The most important part of due diligence is to read any and all documents. Ask for specific documents and read them. Documents that you definitely want to read include any and all leases, customer, supplier/vendor, payroll and employment contracts or agreements. In all cases look for clauses about assignment, changes in ownership, payment terms such as balloon payments and personal guarantees.
Never accept “I don’t know” or “that information is not available” or “the information that you are requesting is not relevant” as an answer to one of your due diligence requests for information. All of the information requests that I have presented within the due diligence list are pieces of information that are or should be readily available and knowing the answers should be a prerequisite to providing a detailed and firm offer to purchase.