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Buying a small business could provide a lot of benefits to the buyer. You could manage it for life and grow it to be a very successful brand, or you could increase the value and sell it at a higher price later. But you can only get these benefits if you buy the right business. To know whether a business is worth buying or not, you need to conduct due diligence before signing the deal.
Due diligence involves fact-checking a business and investigating if it is what the business or the owner claims it to be. It involves examining the business records, checking the online reputation of the company, interviewing the employees, ascertaining the customer and supplier base etc. Due diligence is no doubt a critical step to be taken by any business or individual prior to making the commitment to any legally binding contract and if done right, should bring peace of mind to both buyers and sellers alike.
Purchasing a business is almost always a risk that can’t be undone. If you buy a business and you discover that the business is not as profitable as the past owner claimed it was, there is little to nothing that you can do to get a refund. So, it is your responsibility to understand every facet of the business before you purchase it.
When you conduct due diligence, you reduce the risk of losing your money, and you get more information that will help you run the business better. With due diligence, you will also know what to expect, and you can prepare better. You can see all possible problems and issues that may arise, and you can rapidly develop solutions to them.
In a small business scenario, the owner is responsible for overseeing almost every aspect of the business. You need to learn the ropes completely and ensure that everything is as promised. Due diligence will give you in-depth knowledge of how the business is run.
Most buyers focus more on profitability and ignore some other things that also vital at this stage. Due diligence involves finding out several things, some of which are highlighted below.
So, some may ask, how do I know that my due diligence is adequate? When do I feel confident enough to say I have done enough due diligence? Well, there is nothing like enough due diligence. Due diligence is not a thing that can be completed. But if you are sure of the following things, you can say that you have a good understanding of the business.
Remember, legal counsel should be involved in conducting acquisition due diligence. Over the years, a few strong-headed buyers have been insisting on handling all the acquisition due diligence themselves, or with the wrong advisors, sometimes at their own peril.
There is no single method that fits all business. Each business has its unique ways of handling due diligence.
For example, if you are buying a small family-owned restaurant, you need to ensure that all their licenses are valid. You need to know if they are licensed to sell alcohol or not. You don’t want to run into legal problems. You need to know where they buy foodstuffs and the meal order most by customers. You also need to know about customers with special bookings amongst other things.
If you are buying a farm, you need to know when tractors and other farm machinery were purchased and when they are due for servicing. You need in-depth knowledge on the stores that you supply, where you buy fertilizer, how often fertilizer and pesticides are attached, the time for hiring extra farm hands, special tricks for making produce stay fresh etc.
Due diligence isn’t only for offline businesses. You can also carry out due diligence for online business for sale. You can visit sites like whois.com to determine when the domain name of the business was registered and the person that registered the domain. You also need to understand other analytics like daily traffic, location of visitors, monthly organic site visitors, domain authority, spam scores, SEO visibility etc. Analytics websites like Alexa, Semrush, Moz among others can help you with that.
Due diligence doesn’t entirely mitigate all the possible risks that a business might face. But it goes a long way in cushioning possible risks. It also gives you a solid framework from which you can create your business plan and implement your ideas. Due diligence will leave you better prepared for problems that may pop up later. With due diligence, you can be confident that you made the right investment.
By Philip Harry | 23/05/2018
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