Your due diligence checklist for buying a business

20% of listed businesses sell, leaving 8 out of 10 unsold. Not just that, but 90% of people who start a business search never buy a company.

Why is that? Because buying a business can be a hard venture. First, you have to define your budget and goals. Then, you need to gather capital, which can often involve the support of equity investors like Venture Capital businesses, and business finance options such as mezzanine finance, venture debt, and loans to buy a business.

Then comes the biggest step, finding a business you really believe in and want to invest in. And once you have found that business, you need to run due diligence.

Due diligence can mean the difference between purchasing a thriving business and ending up with a list of possible liabilities. But what should you include when running due diligence?

Here’s a checklist.

What is due diligence?

Due diligence is an investigative process that you, as the buyer, perform in advance of purchasing a business. It is designed to confirm whether or not the business is what it says it is. The due diligence process involves looking at a range of documents, assessing financing and legal risks, and understanding the true performance of the business. This can help you uncover any potential red flags before the sale is complete. If you’ve ever bought a house, you may be familiar with the process of assessing the house’s true value before purchasing, due diligence is like that, but for a business instead.

The benefits of running due diligence effectively

Beyond ensuring you are not caught unaware by red flags, running due diligence can give you the leverage you need to negotiate a suitable price for the business. It can also show you hidden strengths, possible growth avenues the current owner may not have considered, and marketing opportunities that could help you ensure you enter into the sale ready to take over and grow.

Due diligence checklist

Here are the things to include in your due diligence process to ensure you understand the investment you are making.

Seller motivation

What are the seller’s motivations? The big thing you’re trying to assess here is whether or not the seller is willing to stay on. If, for instance, you’re purchasing a services business that runs on relationships, you might want to consider how the current owner leaving might impact the business.

Strategic fit

Consider the industry. Is it an industry you understand and if not, can you get up to speed quickly? Do you know how to speak to the team members, the clients and the suppliers, and if not, can the current team help out?

Let’s say, for instance, you run a marketing agency and are considering purchasing a competing agency. If the agency performs the same basic functions but in a new industry or new vertical, that might be a strategic fit. Or, if it’s a social media agency and your social arm is currently underdeveloped, that also might make a good strategic fit. On the other hand, if you’re a marketing agency buying a creative agency or PR business, there may be more to consider when assessing strategic fit.

Documentation

There are a wide range of documents it is important to request and assess to ensure you understand exactly what is going on in the business. Ask for their profit and loss breakdowns, balance sheets, customer contracts, supplier contracts, and a list of assets including any financing agreements.

Assets and liabilities

You’ll want a detailed list of any assets as well as any liabilities. Remember to include inventory on this list, as well as ensuring you gain a strong understanding of who owns any tools, technologies, and software products at the business.

Legal standing

Check there are no outstanding legal disputes currently open. Verify who owns the business and what the structure of the business is and try to get to grips with whether there are any possible legal liabilities that could become a problem in the future.

Marketing and business development

How are deals made? How robust is their marketing strategy? Are there any contracts currently in place? Consider churn rates, along with how new business is acquired, and how sustainable their client acquisition methods are.

You may also want to look into any reviews or testimonials. Does the business have a good reputation? Consider if, when you take over, business development and marketing efforts will continue to be as effective as they have been historically, at the very least.

Financial standing

Look deeply into the financial standing of the business. Along with assets, liabilities, and profit and loss documents, consider the wider financial standing of the company. Look into their cash flow projections and review their outgoings to ensure the projected growth is realistic.

Operations

Review key business processes, including any tools and systems currently used. How well documented are the processes? It’s important to know that the infrastructure will continue to work as proposed and that operations are scalable, so you won’t run into any major issues in the coming months.

People

Many businesses depend on their team to function, so you’ll want to look closely at how likely the current team is to stay long-term once the business is sold.

How to approach due diligence

It can be extremely exciting to find a business you want to buy, but this isn’t a process you’ll want to skip or rush. Due diligence doesn’t just protect you from a bad investment, it can also help you assess whether or not you can negotiate a reduced purchasing price, and how much growth you might be able to see.

Remember, buying the business isn’t all you’re signing up for. Depending on your operational structure, you may be heavily involved with this business for years to come. You want to be sure it’s the most suitable company for you.

Find a business loan with Funding Options by Tide

We help connect eligible borrowers to our network of over 120 lenders offering between £1,000 and £20 million. Whether you want a loan to buy a business, a bridging loan, mezzanine finance, or a secured business loan, submit your information below and we will get back to you to let you know if you’re eligible.

Find a business loan.

Please note that the information above is not intended to be financial advice. You should seek independent financial advice before making any decisions about your financial future.

It’s important to remember that all loans and credit agreements come with risks. These risks include non-payment and late-payment of the agreed repayment plan, which could affect your business credit score and impact your ability to find future funding. Always read the terms and conditions of every loan or credit agreement before you proceed. Contact us for support if you ever face difficulties making your repayments.

Funding Options, now part of Tide, helps UK firms access business finance, working directly with businesses and their trusted advisors. Funding Options are a credit broker and do not provide loans directly. All finance and quotes are subject to status and income. Applicants must be aged 18 and over and terms and conditions apply. Guarantees and Indemnities may be required. Funding Options can introduce applicants to a number of providers based on the applicants' circumstances and creditworthiness. Funding Options will receive a commission or finder’s fee for effecting such finance introductions.