Practice Due Diligence When Buying A San Diego Business

San Diego Business and Due Diligence

When buying a business, there are always risks. The process becomes even more nerve-wracking because a business is different from any other asset one can buy. While some of the aspects of the business may be tangible, many are not. The business will likely have receivables, inventory (both completed products and parts), intellectual property, and goodwill and reputation. Many of these assets may not have the value that the seller claims they have and may be difficult to appraise.

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What is due diligence?

Because there are so many hidden variables in buying a business, purchasers will usually engage in due diligence. The main purposes of due diligence are:

  1. Verification of the information provided by the seller
  2. Exposure of any material information the seller hasn’t provided

This process can assist in determining if a business is as valuable as it claims and saves you from any poor acquisitions. Due diligence will then usually have two phases:

  1. A request is made for certain written documents, which the buyer then reviews
  2. The buyer conducts on-site verification possibly using company personnel interviews

The parts to due diligence

The process of due diligence is an exhaustive one and it contains, usually, three parts. These parts include:

Legal: The legal portion of due diligence involves ensuring the company’s validity; accurate and complete understanding of the company’s information by the buyer; the buyer’s awareness of any litigations pending; the adequacy of current insurance, and the company’s compliance with all applicable laws.

Financial: The financial portion of due diligence involves ensuring the accuracy of financial information used to make the decision to buy the business and to determine the purchase price; the buyer’s thorough understanding of the target company’s finances so that it can include future potential contingencies; there are no customer collection or cash flow issues; and the buyer has a full understanding as to any future liabilities.

Operational: The operational portion of due diligence involves ensuring the business will be as functional as the purchaser expects after the acquisition.

When is due diligence enacted?

The process of due diligence usually begins after both parties execute a Letter of Intent. The letter of intent will contain important information about the due diligence process. It also gives the potential buyer the acquisition target’s records.

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