What Does 'Due Diligence' Mean When Buying a Business?

If you don't take the due diligence stage of buying a business seriously, you could end up with a dog on your hands. Examine these five crucial areas that require attention.

The term "due diligence" is synonymous with "background check" and refers to the period during which buyers make sure they have all the information they need to proceed with the transaction. At this point buyers are focused on a particular business they are seriously interested in purchasing.

Note that there is no set amount of time that must pass during due diligence -- take as long as you need to answer all of your questions. If you haven't covered them already, you should examine the following areas during the due diligence period:

• Personnel. Review employees' skills, experience, wages and salaries, payroll procedures, and other relevant human resources issues.
• Financial operations. Examine the company's books and records, as well as all accounting and bookkeeping methods. Analyze cash flows, both present and projected. Look at accounts receivables. Consider debt and bank or lender relations. Consider services and product pricing and its consistency with industry standards. Read Due Diligence When Buying a Business for guidelines on specific documents that you should examine.
• Marketing. Examine the company's advertising campaigns and public relations programs (if any). Analyze marketing and sales strategies. Look at how your competition markets and advertises their products.
• Property/equipment. Review all appropriate leases and/or deeds. Conduct appraisals for all equipment and assets. Consider depreciation in property and equipment values.
• Business operations. Consider location, inventories, vendors, suppliers, management, customer relations, insurance policies, and any other topics specifically related to the business you are considering buying.

Consider using a Due Diligence Checklist to help guide your efforts. In addition, it's good practice to consult an attorney when you're doing due diligence on a company in anticipation of buying it.

Find more great tips and advice on buying, starting or selling businesses at AllBusiness.com.

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