The term due diligence refers to the process by which all information relating to the business you want to buy is reviewed. The purpose is to evaluate all the legal and financial information relating to the business, so you can assess its value and any risks that are involved.
You should consider whether there are staff contracts and employee handbooks in place. Ensure to read these documents to know what systems operate for the employees of the business. Consider in particular what remuneration packages are in place and whether they are coming up for review.
Will you be able to continue using the same suppliers? Have the suppliers been providing unwritten discounts, if so consider that their charges to you may increase.
You should establish exactly what it is you will be buying and if the business is a limited company will you be purchasing shares or assets? Also consider what other assets may exist such as mailing lists and the business name and whether these can be transferred.
Consider what the industry is like, is there an avenue for expansion or is the industry attracting regulations that may prevent growth and may increase greater competition.
Does the business have in place all the permissions it requires to operate as it does? Does it comply with all licences?
As above you may want to consider why the business is being sold and whether this may affect your decision to buy. If not you will want to know whether the seller is an integral part of the success of the business i.e. is it the seller’s personality that has led to greater profitability and do you have the same skills to mirror the success? It may be worth asking whether the seller will be able to train you or whether you can work in the business for a short while to establish the day to day running operations.
Is the current equipment in line with current industry standards or will it require upgrading? Consider the condition of the equipment and whether you will have to replace any of it due to natural wear and tear. Is the equipment leased to the business, and if so can the lease be transferred?
Throughout the process you should be considering the tax and legal implications, intellectual property, the business’s operations and some if not all of the matters listed above. As you will be privy to some confidential information relating to the business you may be asked to sign a confidentiality agreement.