Business purchase due diligence involves, for lack of a better phrase, "looking under the hood" of a business to determine whether or not you wish to move forward with purchasing said business. This involves inspection of company records from many different angles.
What's the Point?
Due diligence is meant to protect the buyer and validate the terms of the transaction. Failing to perform an adequate due diligence prior to a business purchase can mean the ultimate failure of the business in the hands of the buyer.
When marketing a business for sale, the seller will want to put the best light possible on the business to make it as appealing to a potential buyer as possible. That's not to say that sellers would willfully deceive a potential buyer, but the numbers may not be as glorious as the seller is representing.
What Does Due Diligence Entail?
For basic small business acquisitions, due diligence often entails two different types of examinations: 1) financial due diligence, and 2) liability/creditor due diligence.
Financial Due Diligence
Financial due diligence requires a buyer to look at several different sets of reports and records, including accounts receivable, prior tax returns, balance sheets, and profit and loss statements. You may want to also look at employee and payroll records for any compensation issues that may have arisen prior to the transaction, but may become an issue after. These records will give the buyer a clear picture of the financial strength of the business being acquired.
Creditor Due Diligence
Creditor due diligence involves a thorough search of court filings, tax liens, UCC-1 and fixture filings, and any judgments against the business or the seller. The purpose of this is to determine whether you'll be receiving good title to the company or the assets you're buying, or whether there are third-party claims outstanding which may put a cloud on title.
(Less Frequent) Intellectual Property Due Diligence
In the case of a small business acquisition, intellectual property due diligence is less of an issue. However, if a sizeable share of the purchase price includes the purported value of a trademark, copyright, patent or trade secret, the buyer may choose to test the strength and value of such intellectual property prior to moving forward with the transaction.
Due diligence is ultimately aimed at putting all of the facts on the table and determining whether the deal is as good as advertised. Without a sufficient due diligence, business purchases are setting themselves up for failure.
An experienced Cary NC Business Lawyer should be consulted before moving forward with a business acquisition.