Purchasing an existing company is desirous because, generally speaking, doing so provides immediate increased revenue sources and growth. However, we need to assure that the business being purchased is worth the purchase price and will be beneficial to the purchaser long term. To do this we need to conduct what’s known as due diligence.
Due diligence is a business analysis process which involves the collection, review and study of certain information regarding the business entity or investment being considered. This due diligence is conducted prior to making the purchase decision or completing the transaction such that an informed decision is made. Due diligence may be applied to various business decisions but is commonly utilized for business transactions including the purchase of a business entity or investment of significant magnitude.
When conducting due diligence, we’re checking various aspects of the business being considered. The overall and fundamental basic considerations and questions when purchasing an existing business include but may not be limited to:
Certified Public Accountants who conduct business and financial audits utilize various confirmation process to assure that the financial statements fairly represent the state of the business being audited. As an example, confirmation of cash, or the bank balance(s), are commonly conducted to assure that the amount of cash reported on the financial statements is correct at a certain date. This is done by attaining confirmation of the account balance from the bank where the cash is deposited. Confirmations of other items may also be conducted to assure the accuracy of the various representations of the business.
How Can We Confirm The Various Representations Of The Business Being Considered?
How Do We Finance The Purchase?
Are There Existing Employees?
There are a myriad of other factors which may be considered during the purchase of an existing business.
What exactly is being purchased is of course an important factor. An existing business may have various liabilities which the purchaser is not willing to assume. These items may be suitably addressed in the structure of the purchase details. For example, the presence of contingent liabilities associated with subterranean termite warranties may be addressed by including an adequate reserve that covers these contingencies.
The purchaser may not want to assume outstanding loan balances or other liabilities. When this occurs, these items are suitably addressed in the final terms of the purchase agreement and may be addressed in various ways.