“My mom always said life was like a box of chocolates,” said the famous movie character Forrest Gump. “You never know what you’re gonna get.” When you invest all your money to buy the business of your dreams, what you get had better be what you bargained for.
“I wish it were not the case, but some business owners run loose books, hide cash, and shove unnecessary expenses through the business,” said Vincent Côté, Broker and CEO at Transitions Business Brokers. After you've chosen a business to purchase and you and the seller have negotiated a deal, you’d better make sure there are no skeletons in the closet before you bet your life savings. That’s what small business due diligence is all about.
During due diligence, you’ll get exclusive access to the business books and records so you can scrutinize the company’s every detail, leaving no stone unturned. Thorough small business due diligence can take weeks or months, every second you spend is usually well worth the effort.
We understand your impatience. You’re eager to take over your new company and start calling the shots. But don’t skimp on buyer's due diligence. What if your earlier assumptions about the business were wrong? What if the seller gave you inaccurate facts—either by mistake or on purpose?
If there are disasters to uncover, it’s better to find out now—while you still have a chance to renegotiate or even withdraw from the deal completely.
Buying a company in Toronto, in the GTA, or elsewhere in Ontario? Here are eight areas to include on your small business due diligence checklist.
Though small business due diligence can take weeks or months, every second you spend is usually well worth the effort.
Reconcile income statements and the balance sheet with other financial records, such as tax returns, bank accounts, credit card statements, and till receipts. Ensure the numbers accurately represent the business’s financial health.
Look at roles, responsibilities, and the specific tasks that fall under each. You may find yourself reviewing policy and procedure manuals, quality manuals and reports, work instructions, flowcharts, task lists, operational efficiency reports, incident or injury reports, and more.
Do all customer, supplier, operational-lease, and equipment contracts fit your business goals? Do the insurance policies meet your needs? Now’s your chance to find out.
Get familiar with the business’s computer systems, hardware, and software. Is the technology owned or licensed, how old is it, will you need to upgrade it soon, and will it require any special knowledge to run it?
Ask questions to learn what the marketing strategy is, what the sales process is, and where customers are dispersed geographically. What are customers happy and unhappy about? Does the business have a high customer concentration or a more diverse customer base?
You’ll want to know which businesses you’re competing with, how much market share you’ll have, whether your industry is growing or declining, and what the regulatory environment is like.
Is there a high level of owner dependence that would hinder transitioning to new ownership? Who does what, and when do they do it? Discover how well key staff members are performing, how much the business relies on them, and whether they’re at risk of leaving.
Review the corporate structure, business strategy, and executive reporting. You’ll want to look at documents such as the articles of incorporation, the corporate minute book, and business plans.
When you go through the Transitions Business Brokers Business Buyer’s Brilliance program, you’ll discover everything you need to know about small business due diligence and walk away with a handy due diligence checklist.
Turn your business ownership dreams into reality! Start mastering the business-buying process today.
