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The importance of due diligence when buying a business

View profile for Karen Edwards
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If you are thinking of buying a business it’s extremely likely that you will want to examine all aspects of the company before committing yourself. Due diligence is a broad definition of an investigation into the financial and commercial activities of a company and includes the gathering, analysis and interpretation of financial, commercial, legal and marketing information. It involves looking closely at all the company’s records – statutory financial statements, management accounts, budgets, internal process controls, analyses and projections/forecasts and any insurance policies. The first step in undertaking due diligence is to evaluate the deal – a preliminary assessment is made of the key risks and future opportunities and a detailed investigation will follow.

Karen Edwards, Commercial Solicitor, says “There are many areas of due diligence that should be high on the prospective buyer’s list – employment terms and contracts, pensions, any outstanding litigation, major contracts, IT systems in place and many more.” For the buyer it’s all about asking the right questions and knowing where the right places are to look. A prospective buyer should ascertain if :

  • There is a clear description of the product or service
  • How good is the cash flow situation • Are there any hidden liabilities
  • Will key employees be staying in the company • Have all articles of incorporation, tax registration certificates, board minutes etc been provided
  • Any lease on premises is in order

There is an exhaustive list of things to be checked when performing due diligence, too many to be listed here, but bear in mind it is what you don’t know that can be your downfall.

For a free initial meeting please call 01202 499255 and Karen or a member of her team will be happy to discuss any questions you may have.

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