So you want to own your own business - Part 9

Due Diligence

While it is challenging to make a comprehensive list of items that a prospective buyer should investigate, what follows is a list of general categories and a few helpful hints. It bears repeating - this is why the buyer should engage their own team of experts.  No one person can have the expertise or the time to cover all the bases that should be covered.

It helps to start with a high level perspective, and then to focus in on areas that pose the greatest risk of future economic impact, whether in the form of lost sales or penalties and legal costs.

• Financial- audit or review of financial statements and their supporting documents, including accounts receivable, payable, inventory, working capital, cash flows, unusual and nonrecurring events, trends, profitability, expense margins, comparison to peers
• Tax matters- historical prompt payments of sales, income, withholding and other taxes, reporting to tax agencies, clearances
• Employee- past and potential claims, disputes, employment agreements, key employee identification, problem employees, compensation review and comparison to industry and market
• Insurance- loss runs, past claims paid and denied, gaps, tail coverage, levels of coverage or lack of coverage, cost
• Operations- inventory obsolescence, distribution, profit centers, etc
• Customers- trends, frequency, concentrations
• Intellectual property issues- trademarks, patents, trade secrets and how managed, phone, email and social media accounts
• Contracts, licenses and other agreements with third parties that need to be assigned, reviewed, or in some way dealt with
• Corporate compliance since inception, prior M&A, affiliates (for stock sales in particular)
• Public searches- UCC, judgments and other public records (may be part of the escrow process)
• Related party transactions- leases, employees who are family members, equipment leased from owner
• Management-structure, decision making process, culture, policies regarding operations, pricing, expense approval, succession planning, etc.
• Privacy and data security- to avoid the impact of a data breach, HIPAA violation, or running afoul of regulations impacting the industry, review privacy policies, history of any breaches, direct marketing practices, and industry specific requirements