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Business

The Importance of Due Diligence: What Business Owners Need to Know When Buying a Business

When you’re in the process of a business merger or acquisition, you need to perform a detailed review to understand its current status, assess potential risks, and ensure that the business assets have been accurately represented as described in the offer letter. This process is called due diligence. When acquiring a business, the due diligence process can be detailed and complicated. You’ll want an experienced business lawyer in Orlando, like our team at The Boutty Law Firm, to help ensure you make a good investment. Here’s what business owners should know about the due diligence process during business transactions.

What is Due Diligence, and Why Does It Matter?

Due diligence is the process of performing an in-depth inspection and analysis of the business before you purchase it. Like buying a used car, due diligence allows you to “look under the hood” of the business to ensure everything is in proper working order and that you’re making a sound investment. Due diligence is performed during any business transaction, such as a merger, acquisition, investment, or partnership. The goal of due diligence is to ensure that the buyer is making a good investment and understands any potential risks or liabilities before officially buying the business.

Due diligence is important because it helps you avoid surprises with the business you want to purchase. It will help you protect your time and money by ensuring you’re investing in an upstanding business that the seller has accurately depicted. Due diligence will also help you make informed business decisions and develop the acquisition plan so you can run the business after the transaction is complete.

Types of Due Diligence

By looking at each area of the business you want to buy, you’ll get a complete picture of the current business standing and be better equipped to make decisions regarding the business. Here are the types of due diligence you should perform when undergoing a business transaction:

Financial

 During financial due diligence, you’ll get a complete and comprehensive overview of the business’ financial status. You will gather relevant financial documentation such as three to five years’ worth of business tax returns, bank statements, balance sheets, profit and loss statements, financial audits, reports, and information about any business debt. You’ll also want to know how the business handles cash flow.

Legal

You’ll want assistance from a business lawyer in Orlando to help perform legal due diligence. During this time, you’ll review partner or supplier contracts to see what established partnerships are already in place. This is also when any risks or liabilities will be reviewed. Your lawyer will review contracts, established agreements, and any pending lawsuits or legal risks associated with the business.

Operational

During operational due diligence, you’ll learn how the business operates on a day-to-day basis. You’ll assess risks and challenges with the current operations so you can make potential improvements once the transaction is complete. You’ll want to investigate whether there are any issues, liabilities, or risks that could set the business up for failure now or in the future. You may wish to speak with employees during this time to get an accurate perspective of the business operations. You’ll also want to review customer satisfaction with the company and assess for improvements.

Technology

Technology is integral to most business operations, so you’ll want to review the current patents, software, and programs it utilizes. You’ll check the business’ cybersecurity protocols, review CRMs and databases, and evaluate current software or apps.

How to Perform Due Diligence

Due diligence can be as simple as reviewing the business’ accounting software or as complicated as having a team of business lawyers perform a detailed analysis that lasts several weeks. Here is how the due diligence process works:

Gather Your Team

You’ll want to assemble your team of Orlando business lawyers, accountants, and industry experts to give you trusted advice about the business’ status. Due diligence is performed after an offer has been accepted and before closing. Many companies aren’t willing to provide the documentation needed to perform a full due diligence report before an offer has been made, so keep that in mind.

Compile Documentation

One of the most tedious and detailed parts of performing due diligence is gathering the paperwork to review. You’ll need to request financial documentation from the business seller, review contracts the business has made with others, interview employees and stakeholders, and audit the current business operations. It’s crucial to stay organized during this process.

Review and Analyze

Your Orlando business lawyer, accountant, and expert team will compile the documentation and conduct a thorough analysis and audit. Findings will be crafted into detailed reports stating the business’ health, risks, and liabilities.

Determination

The end goal of due diligence is to decide whether you should proceed with the business transaction. Performing due diligence will allow you to get an accurate view of the business so you know what you’re getting into. Once the assessment has been made and risks or liabilities have been identified, you can proceed with closing the transaction and start to draft the purchase agreement.

The Boutty Law Firm: Business Lawyer in Orlando

Our team at the Boutty Law Firm is experienced in performing due diligence for many business transactions. We’ll help you ensure the terms for your letter of intent (LOI) are represented accurately. After that, your lawyer will help draft the purchase agreement, and you can start the closing process. Contact us at 407-622-1395 or schedule a consultation online to discuss how we may aid you in acquiring a business.

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