You have been to buy a business for sale for a long time and finally found the business of your dreams. You are about to start due diligence but do not know what to look at. You have only a short period of time, usually two weeks to ask for information, after which you are now starting to prepare a final purchase and sale agreement. Here is a partial list of things that you should review during your due diligence:
- internal financial statements for the current year and also the previous year
- review monthly sales to see if the business is seasonal or if there is an unusual increase in sales just prior to the listing of the business for sale
- external financial statements for the last three years plus corporate tax returns
- notice of assessments of the corporate taxes
- assessments from any sales taxes
- report from any audit which has taken place, including but not limited to sales taxes, worker compensation, Employers health tax, fire inspection etc.
- copy of all leases
- review the clauses in the premise lease to determine if the lease is transferable and if the landlord has a clause which allows them to terminate the lease. Some leases state that the landlord must relocate you but some leases give the right to terminate the lease to the landlord. If the lease is terminated, is the business movable to another location?
- summary of top 10 suppliers and purchases from each one. Is there any economic dependence on the supplier?
- summary of top 10 customers and determine if there is economic risk if the top few customers leave. If one customer represents 70% of the sales, if they leave, the business may not survive. As a result, you may want to consider offering a vendor take back financing based on the customer staying for a three year period.
- find out who the competitors are and see what this company is doing differently
This is a partial list of what to look at during your due diligence. You may want to contact an accountant to assist you review and understand these documents.