If buying an existing business or assuming operations, the first and most critical step in evaluation of the opportunity is due diligence analysis of current operations. More than merely asking how the business functions, this is a forensic analysis of all facets of current operations, with one caveat – no matter how deep you look, the odds are overwhelming you’ll find a gotcha later on.
The goal of due diligence is to surface the big issues and gain critical understanding of the large issues facing a new operator or owner. This is where you either find the skeletons or the closet they’re likely to be hiding in – debts, structure, guarantees, obligations, common practices, financial health, etc. Due diligence is intended to educate you to make a decision on whether or not to continue with your interest to acquire a business.
In the case of our recent establishment of Master Portable Floors, Inc., we weren’t buying an existing business, we acquired the rights to manufacture, sell, and distribute a product manufactured from a patent. The patent holder granted us exclusive rights to do so. As part of accepting rights, we agreed to fulfill the backlog and honor a few commitments of the previous company that held rights to the patent. As such, due diligence was a major step in our interest qualification, not unlike a purchase decision.
In the member area of JSLogan I’ve posted the actual Due Diligence Checklist we used to qualify our interest in establishing Master Portable Floors, Inc. Login to the member area, click on Master Portable Floors from the Member Menu, and you can view the checklist. If you’re not already a member, registration is quick and easy, just use the simple two field form on the left sidebar of JSLogan.
While not all sections of the checklist apply to all business opportunities, it’s a good list to get you going and looking in the right places for information. So much of the due diligence process is discovering what you know and don’t know, don’t be afraid to ask for more than you need and probe every area of the business you can think of.
Do you have any areas of due diligence you believe are left off of our list? Any tips to pass on to others looking to qualify the purchase of a busines?