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Dos and don’ts of conducting due diligence

If you are planning on buying a business, chances are you have already done a fair amount of research. You probably know the type of business you want, where you want to buy and how much you expect it to cost.

No matter how informed you think you are at this point, the research element of your business aspirations is not complete. There is still more to do when purchasing a business in the form of due diligence. 

Due diligence refers to the investigation you must conduct into a business before buying it. Doing so allows you to get as much information as possible about the company, so you know what you are buying. Below are some dos and don’ts to consider if you plan to buy a business in Alberta.

Do: 

  • Include provisions in your intent letter
  • Be thorough
  • Examine tax records and returns
  • Review the company’s ownership information and organizational chart
  • Assess intellectual property rights
  • Collect financial projections
  • Examine sales and marketing strategies and resources
  • Visit the physical location
  • Collect information on leases, mortgages and other real estate matters
  • Secure a list of employees as well as compensation and benefits details
  • Review existing contracts with employees, vendors and contractors

These are just some of the details to should scrutinize when conducting due diligence. This article provides a more comprehensive list of the information you should collect.

Do not: 

  • Rush through the process
  • Accept information without documentation to back it up
  • Focus only on liabilities; also look at opportunities
  • Rely on the help of people with conflicts of interest
  • Antagonize sellers or get stuck on pointless provisions
  • Wait to examine red flags
  • Negotiate without the help of legal and financial professionals
  • Get disorganized, as it could delay the process and create unnecessary confusion
  • Allow passion or enthusiasm to cloud objective details

These brief lists can give you an idea of the types of decisions you should and should not make when investigating the details of a prospective business opportunity.

Undoubtedly, buying a business is a major investment. Conducting proper due diligence is a critical component. As such, buyers should be careful, thoughtful and equipped with legal and financial support throughout this step. 

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