Strong Due Diligence Demands More Than Checking Profit and Loss

Buying a business is a major investment that comes with numerous possible sources of risk. Investors and aspiring entrepreneurs seeking to acquire an existing business should perform thorough due diligence before making an offer or committing to a purchase agreement. Lapses that occur before a deal is closed might leave new owners paying pre-existing debts, facing litigation for issues that occurred before the ownership transition and struggling to keep the company solvent.

Due diligence involves more than just a cursory review of financial disclosures made by the seller. Those disclosures may not be entirely accurate. Comparing the data provided by the seller with publicly available information regarding the company and the industry in which it operates can lead to critical discoveries.

A shift in demand or in operating costs could be the underlying reason that an existing owner put their business on the market. They may want to transfer control before the company becomes less profitable. Validating that the company can continue to generate profit is an important aspect of the pre-purchase process.

Additionally, buyers need to conduct a careful analysis of the company’s performance, its reputation with customers and even its relationship with its employees in recent months. Those who are unaware of potential issues might fail to include necessary clauses in a contract to limit their liability for undisclosed pre-existing debts or lawsuits brought by either employees or consumers.

Reviewing online chatter about the brand could reveal that recent customers appear dissatisfied with the organization’s goods or services. Interviews with employees and ratings on worker websites could help validate whether the company fulfills its obligations to employees and complies with applicable workplace standards. Buyers may also want to investigate pending litigation, regulatory concerns or compliance issues that could affect the company’s future operations.

Due diligence can be time-consuming, especially for those looking to complete a purchase while fulfilling other responsibilities. There are many key details that can easily be overlooked. Partnering with an experienced business law professional helps aspiring buyers understand what specific research might be necessary. An attorney can work alongside accountants and other advisors during the due diligence process while also reviewing purchase agreements and other transaction documents before the sale is finalized.

The Law Offices of Donald W. Hudspeth, P.C. counsels aspiring Arizona business owners during the due diligence process for all types of acquisitions and mergers. Schedule an initial consultation in our Phoenix office by calling 866-696-2033 or contacting us online.