The Importance of Due Diligence

ATLANTIC HIGHLANDS, NJ – October, 2008 – While buying a small business may seem to be an exciting venture, you need to do your homework when gathering information on the business. The ‘doing your homework’ process is known as conducting due diligence, meaning exercising care in a transaction. Due diligence is used to investigate and evaluate a potential business purchase. It pertains to all aspects of the past, present, and predictable future of the business you are targeting. Due diligence should be conducted to assure you that the business is what it appears to be. You might find a deal killer in the business, such as bad financial standing or pending lawsuits, which will help you to avoid a bad business transaction. The procedure will also help you obtain information which will be useful to negotiate pricing, estimating the value of assets, and to determine representations and warranties. After the buyer and seller has agreed that they should purse a business transaction and a preliminary understanding has been reached by way of an accepted Offer To Purchase, due diligence should be conducted by yourself and the professionals you have involved with your business purchase, before you sign a contractual business transfer sale contract. In order to perform your investigation, the seller should have prepared some of the information for you such as financial statements and business plans in form of a confidential memorandum. After reviewing what has been handed to you, on site visits to the business should be coordinated, as well as researching into external sources such as customers, suppliers, industry experts, and market research firms. It is important to know that it is impossible to learn every little thing about the business you are interested in, but you will be able to ascertain enough to make an informed decision. The time alloted for due diligence can vary from situation to situation. The preliminary agreement usually spells out how long a buyer has. Taking too much time, or putting too much effort into due diligence can kill a deal. Putting too much effort into due diligence can greatly offend the seller, which can lead them to walk away. To prevent from losing out on your opportunity, you need to prioritize your investigation and analysis by spending your time on the vital issues, and less time on the trivial issues. Throughout the buying process, due diligence is essential to closing the contract. As a seller, make sure that all documents are organized and accessible to the seller, to speed up the buying process. As a buyer, prioritize your tasks within the due diligence effort, in order to succeed in learning important information about the business that will lead you to make an informed decision. If you are interested in buying or selling a business, please contact Achim Neumann, a leading business broker in New Jersey.