Due Diligence When Buying a Business
Performing Due Diligence When Buying a Business.
The below is a sample letter that we might receive from a potential client looking to buy a new business and a draft of what my response might be.
Hi, John. I’ve been presented an investment opportunity that I think I’m really interested in. There are a lot of unknowns and I have lots of questions.
The opportunity is a minority ownership in a business. The company is in an industry I’m very familiar with. I believe in the longevity of the business.
Certainly, I would need to know the value of the business before buying in. Could you help me with that? Do I need to ask for tax returns, P&L, etc.?
I would also like to be aware of any tax implications the investment might have. Thank you in advance for your expert opinion.
Below is my response:
Sounds great. I’ll be more than happy to help you walk through it.
I would suggest getting copies of the last two business returns as well as a year-to-date financial statement.
I would also get a feel for the business segments and the number of different clients they have so we can address business concentration risk.
One of the biggest issues with setting up a partnership is having a agreement in advance making sure that if you leave your able to start your own business but also having the flexibility that if they leave that you are a protected from them taking all the clients with them.
Shareholder agreement will need to be examined and thought about in great detail to make sure that they are adequate for all parties. Then we will need to determine the value of the business. Also want to take great care to add value or subtract from that value for minority versus majority ownership interest.
Just a few initial thoughts to get a started towards your long-term business success.
