Due Diligence AKA The Investigation

By ERIKA BAEZ-GRIMES Business Broker | Certified M&A Advisor | Commercial Real-Estate

When making a significant acquisition—whether acquiring
a business, purchasing real estate, or engaging in a
partnership—conducting due diligence is crucial. Due
diligence ensures that you understand the financial,
operational, and legal aspects of the asset or entity in
question. Here are a key items buyers and acquirers review
with their deal teams to make informed decisions.

1. During Financial Due Diligence items to review with your
advisory team can include:

• Financial Statements: Review profit and loss statements,
  balance sheets, and cash flow statements for at least the past
  three years.
• Tax Returns: Analyze federal and state tax filings to confirm
  compliance and assess liabilities.
• Revenue and Expenses: Verify sources of revenue, customer
  contracts, and major expenses.
• Accounts Receivable and Payable: Ensure outstanding
  debts are collectible and liabilities are manageable.
• Debt and Liabilities: Review loans, credit lines, and
  contingent liabilities.
• Profit Margins: Assess profitability trends and sustainability.
• Financial Projections: Evaluate future revenue forecasts and
  underlying assumptions.

2. During Legal Due Diligence, items to review with your
legal team include but are not limited to:

• Corporate Documents: Verify business registration,
  operating agreements, and articles of incorporation.
• Contracts and Agreements: Examine customer agreements,
  supplier contracts, and partnership agreements.
• Litigation History: Check for pending or past legal disputes
  and regulatory violations.
• Compliance and Permits: Ensure compliance with industry
  regulations, zoning laws, and necessary permits.
• Intellectual Property (IP): Verify trademarks, patents,
  copyrights, and proprietary technologies.

3. During Operational Due Diligence, items to consider:

• The Business Model: Analyze revenue streams, value
  proposition, and competitive advantages.
• Employees and HR Policies: Review employee contracts,
  benefits, and key personnel dependencies.
• Supplier and Vendor Relationships: Assess terms and risks
  associated with suppliers and partners.
• Customer Base and Retention: Evaluate customer
  acquisition strategies and retention rates.
• Technology and IT Infrastructure: Ensure software,
  cybersecurity, and data storage practices are up-to-date.
• Industry Trends: Research market growth potential and
  regulatory changes.
• Competitive Analysis: Identify major competitors and analyze
  market positioning.
• Customer Demand: Assess customer needs and potential
  demand shifts.
• Economic Factors: Consider macroeconomic conditions that
  could impact profitability.

4. During Real Estate Due Diligence (If Applicable) items to
review may include:

• Property Valuation: Compare property value with market rates.
• Title and Ownership: Verify ownership records and title status.
• Zoning and Land Use: Ensure property compliance with
  zoning regulations.
• Inspection Reports: Conduct environmental and
  structural inspections.
• Lease Agreements: If applicable, review lease agreements
  for tenants.

5. During Risk Assessment and Contingency Planning review
items such as:

• The SWOT Analysis: Identify strengths, weaknesses,
  opportunities, and threats.
• Exit Strategy: Have a clear plan in case the investment does
  not meet expectations.
• Insurance Coverage: Ensure suicient insurance for business
  or property risks.
• Crisis Management Plans: Prepare for potential operational
  disruptions or economic downturns.
  

Conducting thorough due diligence is essential for mitigating
risks and making sound buying decisions. A well-structured due
diligence process can ensure transparency and reduce a level of
uncertainty. If you’d like more information about Due Diligence,
Buying or Selling a business please visit:
www.NovaBusinessInquiry.com