Login or signup
36
BUYING A SMALL BUSINESS

How to Conduct Due Diligence

Your goals include managing risk, finding the right professional counsel, and haggling over price.
Advertisement

You have 60 to 90 days to make sure that no hidden time bombs are ticking away in the business you are about to acquire. Ready, set, go! Such is the proposition of due diligence. The process kicks off when both the buyer and the seller sign a letter of intent, or term sheet, which sets the starting purchase price for a deal. By signing the letter, the seller agrees to open up his or her company to a top-to-bottom audit by the buyer and adjust the sale price based on the audit's findings. Here's what to keep in mind:

1. It's about managing risk. Double-check financials, tax returns, patents, and customer lists, and make sure the company does not face a lawsuit or criminal investigation. And be extra cautious if the company has never undergone an audit from an outside accounting firm. The company's customers can also be quite informative. Ask the sellers for a list of their most favored clients-and then call the customers that didn't make the cut.

2. Find the best help money can buy. Tom Taulli, an attorney and author of The Complete M&A Handbook, advises you to hire an M&A attorney and a forensics accountant.

3. Prioritize the people. Do background checks on the company's key officers.

4. Prepare to haggle. You can and should use any flaws that the audit uncovers to negotiate down the sale price. Due diligence, says Taulli, is "a chance to get a better deal." 5. But don't go overboard. Remember that the whole point of buying a company is to add people to your own organization. Whether or not the seller and staff stay on after the deal, they may prove useful as advisers in the future.

Last updated: Oct 1, 2004

DARREN DAHL is a contributing editor at Inc. Magazine, which he has written for since 2004. He also works as a collaborative writer and editor and has partnered with several high-profile authors. Dahl lives in Asheville, NC.




Register on Inc.com today to get full access to:
All articles  |  Magazine archives | Comment and share features
EMAIL
PASSWORD
EMAIL
FIRST NAME
LAST NAME
EMAIL
PASSWORD

Or sign up using: