Due Diligence When Buying a Business: What to Look For
Due diligence is the process of investigating a business before you commit to buying it. A thorough due diligence process can uncover hidden liabilities, identify risks, and give you the information you need to negotiate the best possible deal — or to walk away before it is too late.
Financial due diligence
Financial due diligence involves reviewing the business's financial statements, tax returns, and management accounts for the past three to five years. You are looking for trends in revenue and profitability, the quality of earnings, and any unusual transactions. An accountant experienced in business acquisitions should lead this process.
Legal due diligence
Legal due diligence covers the business's contracts, leases, intellectual property, employment arrangements, and any litigation or regulatory issues. Key questions include: Are the contracts assignable? Is the lease on favourable terms? Are there any undisclosed liabilities or contingent claims?
The lease
If the business operates from leased premises, the lease is one of the most important documents to review. Check the remaining term, the rent review mechanism, the assignment provisions, and any personal guarantees. A short lease with no option to renew can significantly affect the value of the business.
Intellectual property
Identify all intellectual property used in the business — trademarks, domain names, software, and any proprietary processes or know-how. Confirm that the IP is owned by the business (not by the vendor personally) and that it will be transferred as part of the sale.
Employees and key personnel
Review all employment contracts and identify any key personnel whose departure could significantly affect the business. Consider whether the vendor's continued involvement is necessary during a transition period, and if so, document this in the contract. Check for any outstanding employee claims or disputes.
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