Having done your research, you should verify the information you have been given about your prospective new business. Once an offer has been made and accepted a period of time is allowed for you to access its books and records. This is known as due diligence. It should give you a realistic picture of how the business is performing now, and how it is likely to perform in the future. It should also highlight any issues or problems which might need warranting or guaranteeing.
There are traditionally three types of due diligence you should do. You might need different advisors for each:
Don't start due diligence until you have agreed a price and terms with the seller. They may agree to take the business off the market during your investigation. This is known as an exclusivity period - and the seller will often ask for a down payment to secure it.
The investigation period is negotiable - but most small businesses need at least three to four weeks.
Ideally you should get accountants and solicitors to help you identify risk areas but, if it is registered with Companies House, you can also obtain copies of the company accounts, the annual return and the other key documents filed by your target business using the Companies House WebCHeck service. The documents can be downloaded from the Companies House website, some at a small fee, helping you assess the value of the business and its assets.
Due diligence is about much more than the finances of a business. You need to come out of this period knowing exactly what you are getting into, what needs to be fixed, what it will cost to fix, and if you are the right person to take on this business.
Key areas to cover are:
Dig as deeply as you can and use whatever documents are available. For instance, if you're looking at employee records, you could check out:
You may also need information from external sources such as the landlord, tax office or bank.
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