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Look Before You Jump - Doing Due Diligence


Doing Due Diligence When Buying A BusinessOnce you have an accepted offer, the clock starts on the due diligence period which ranges from 17 to 30 days according to the terms of your Purchase Agreement.  Some of the items to review are:

Three year's tax returns on the business in one of the following formats:

a.  Audited /best
b.  Reviewed /better
c.  Compilation letter /good

Three year's profit and loss statements plus the year-to-date P&L

Sales tax reports, if applicable

Lease on the business

Bank Statements for the previous year and year-to-date

Contracts with vendors and employees

Lease agreements on equipment

Other items that are business specific, i.e.; franchise agreements

The above materials should get you started on the road to due diligence and buying a business. Another good strategy during this period, if agreeable to the sellers, is shadowing them to get a good look at the business operation.  The due diligence period of a sale is the dating period for the buyer and seller.  The close of escrow is like exchanging vows-- once you close escrow, it is too late to reverse the sale.  As Davy Crockett once said "be sure you are right, then go ahead, and never look back".  It's the same principle with a business sale; you like it, you review it, you buy it, then you make it successful.

Determining cash flow is the most important goal of the due diligence process.  For all intents and purposes you are buying a job and must be sure the business will meet your expectations.  Cash flow is considered the total amount of money an owner can get out of the business.  This includes items such as salary, taxes, insurance, autos and auto expenses. Additionally, non cash items such as depreciation and amortization, profits, entertainment and travel, retirement fund, parties, gifts, and any expense items that are incurred at the owners discretion and not required to run the business.

In my experience, buyers project improving the business 10 times better than the seller's current efforts, and in most cases they do end up with greater numbers than the previous owner.  Sellers often get tired eyes after a few years of operating a business. Once you've been in business for a few years, let's face it, you've most likely tried everything at least once.  Buyers will probably try the same things again and then some, but with a different twist, or at a different time. Fresh eyes and energy are what make a business succeed.

Due diligence is a process to make sure you are getting what you expected, laying the foundation where you can invest your new enthusiasm to grow the business. There is nothing better than being your own boss and driving your own success.

Bob HughesAbout The Author:  Bob Hughes is a business broker in the Coachella Valley (Riverside County) and San Diego County areas assisting business buyers and owner/sellers throughout the Inland Empire. You can reach Bob by phone at 760-323-8311.


Categories: BizBen Blog Contributor, Deal And Escrow Issues, Due Diligence Issues, How To Buy A Business



  Helpful Resources To Assist In Selling And Buying California Businesses
George Lanza, Business Broker, At Plethora Business Sales

Plethora Businesses, a division of A Premier In Services, Inc., is a Business Intermediary Consulting Firm headquartered in Orange, California. Plethora specializes in the listing and sale of small and medium sized private businesses.

Mike Brewer: Liquor License Brokers, ABC Consulting Services

Liquor license brokerage and consulting services. We provide: Alcohol License Transfers Application Consulting & Processing, Liquor License Purchases & Sales, City Zoning Permits & Land Use Entitlements, Public Convenience or Necessity Findings and Letters. Phone Mike Brewer direct at 800-437-1100.

Rick Carlson, Business Broker - Southern California

You Will Never Feel Lost In The Shuffle. Many Brokers Simply Send Out An NDA And That's The End Of Communication. All Buyers Receive A Personal Meeting With An Ace Acquisition Specialist So They Can Recommend The Perfect Business For You. Phone Rick direct at 800-985-4939.

Jack Oh, Business Broker - LA, Orange Counties

Business broker and real estate services in the Los Angeles and Orange County areas. 10 years experience with great negotiating skills. To sell a business or buy a business in the LA or Orange County Areas phone Jack and his team at 562-787-4989.

Peter Siegel, MBA - SBA Loans, Non SBA Financing Assistance

For over 25 years I have provided niche business purchase financial advisory and loan placement services with SBA and Non-SBA Loans, Retirement Plan Conversions, Private Investors, etc. Financing amounts available: $20K to $7MM. Call today to get pre-qualified or receive financing: 866-270-6278.

William Park, Business Broker - Southern California

Highest Volume Broker in California, Simply Check our HUNDREDS of Listings! Over 25 Associates, Speaking Dozen Languages, Helping Buyers and Sellers of Small Business since 1982, Centrally Located between Los Angeles and Orange Counties, while Riverside & San Bernardino Counties are Very Accessible.

Ryan Clark, Business Broker, Southern California

The Veld Group provides a refreshing approach to Business Brokerage, Mergers & Acquisitions and Business Consulting and Valuations. From Your Street to Wall Street, we cater to Main Street Businesses as well as more complex Strategic Firms and Start-Ups. Phone Ryan at 310-652-8353.

Chris Seaman, Business Broker - San Diego County Area

Founded in 1994, First Choice Business Brokers has accelerated to become one of the most successful Business Sales Organizations in the world. Our team of agents have gone through extensive training to become experts in the field of business brokerage. Call Chris at 858-578-4111 for more info.


  Related Articles, Events, Blog Posts, Discussions, Videos, Interviews
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Due Diligence Issues: What Business Buyers Should Know About The Process

Willard Michlin, CPA, CFE at 800-864-0420 elaborates why you can do a large portion of the due diligence yourself, depending on your background, but you should never try to do it solely on your own. In this BizBen blog post he explores ways business business buyers get themselves into trouble.

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