Due Diligence Checklist: Dont Buy a Business Without This

Entrepreneurship can be an adventurous journey, like a rollercoaster ride. It keeps you upside down, plunging and spinning at high speeds, but still maintains an exciting level. Many aspiring individuals feel the same when embarking on their entrepreneurial journey. However, starting a business in the United States from the ground up involves a lot of risk. According to the U.S Bureau of Labor Statistics, 20.4 per cent of businesses fail in their first year after launching, 49 per cent fail in their first five years and 65 percent in their first 10 years. They face failure due to a lack of expertise, decision making skills and financial mismanagement.

However, if they conduct a thorough market research, things can turn in their favor. Instead of starting a business from scratch, acquiring an established business is way more feasible and reliable. It comes with a proven track record, a loyal and expanding customer base, equipment, goodwill, a supply chain, and more, to grow with great potential. However, acquiring an already established venture still involves risk due to due diligence shortfalls.

You may end up investing in a business that has hidden liabilities, outdated equipment, a bad market reputation, and improper cash flow management. Worry not! Here is a comprehensive due diligence checklist to help you buy the best business opportunity in Michigan right now. With proper market research and document evaluation, you maximise your return on investment and enjoy substantial growth.

1. Legal Due Diligence Documents to Look For

First things first! Thoroughly check the legal documents related to the company's operations before buying an existing business for sale. It helps you identify and reduce potential legal risks that could have serious consequences for both parties. You may need copies of the following legal documents:

- Occupational License

- Local/State/Federal Business Licenses

- Shareholder Certificate Documents

- Building permit papers

- Zonal and land use permits

- Power of attorney papers

- Tax registration files

- Outstanding/previous legal cases

Note: Hire a professional lawyer to help you with complex legal matters for your new investment.

2. Financial Documents: Know the Wealth of a Prospective Business

Individuals looking for lucrative businesses for sale in Michigan should prioritise financial due diligence to make an informed decision. It is crucial to assess the financial health and viability of a venture, which includes the cash flow, annual turnover, net profit margin and potential earnings. Here are a few things to consider when evaluating financial documents:

- The last three years of audited financial statements

- Updated tax return files

- Letters and replies from auditors for the last five years

- Bond, Marketable securities and other company investments

- Capital structure

- Insurance polices

- Copies of all credit and loan agreements

- Capital budgets, projections and strategic plans

- List of unrecorded liabilities and collateral for debt

- Details of shareholders, like holding shares and voting rights

- Foreign exchange liabilities

- Gross margins analysis

- List of non operational expenses

- Fixed and variable expenses

- General/ bookkeeping ledger

3. Due Diligence of Sales and Marketing Documents

It is always good to buy a business that offers a growing and loyal customer base with proven marketing strategies. To make the right buying decision, you'll need to assess the sales and marketing documents thoroughly.

This includes a detailed overview of sales and marketing strategy, revenue generated from customers, marketing or sales coordination protocols, contact of 10 suppliers, sales report analysis, details of existing sales contracts, and also asks the seller to provide you with the documents exhibiting the relationship between marketing expenditure and revenue growth.

Also, ask for the details of credit terms with your existing customers, along with the sales percentage from all marketing channels, including direct sales, online, and offline.

4. Complete details of Employees

It won't be a wise decision to acquire an existing business for sale without having comprehensive details of its employees, their salaries and other HR related aspects for smooth transition after buying a business. Due diligence includes:

- A complete list of employees with their designations and salaries

- Detailed information on employee welfare and health benefits

- List of employees received a bonus

- Full details of qualified and unqualified retirement plans

- Copies of agreements related to any employee, employment or consulting firms.

- Current HR polices

- Updated resumes of key employees

- Policy of bonuses, commissions and incentives

- Documents of past legal issues with employees

- The claim history of unemployment insurance and workers' compensation

- Details of the recruitment process

- Full details on grievance processes and labor disputes of the last three years.

5. Tangible Asset Due Diligence

Ensure that you thoroughly review the documents for the commercial property and plant, equipment, technology and inventory before buying an existing business for sale. These are tangible and long term assets that streamline the business operations and help you stay consistent throughout the process. Ensure you choose a business that comes with a fully appointed property with all necessary equipment and fit out included.

6. Contract Due Diligence Matters

Do not forget to evaluate the customer and supplier contracts, settlement and franchising agreements (if you have), partnership deeds, accounts receivable and payable schedules, long leases, non compete agreements, and guarantee agreements. Do not buy if the company refuses to show you the contract documents, as this could turn into an awful experience.

7. Due Diligence Associated with Intellectual Property

Don't forget to check patents, trade secrets, copyrights, IP claims and litigation, domain names, patent applications, licenses, industrial design applications, and agreements related to ownership and advertising copy and logos, as these are valuable assets of the company. It helps you understand how the business work and created a USP in the competitive market.

8. Taxes Related Documents

- It is difficult to decide whether a business for sale in Michigan you are acquiring is a good investment until you meticulously conduct a tax related due diligence to stay compliant to business regulations. This includes:

- All income tax returns of the last three years

- All sales tax returns of the last three years

- Tax settlement documents for three years

- All employment tax filings for the previous three years

- Audit reports

- Tax liens

Wrapping Up

Considering that the due diligence checklist is essential to prevent potential risk and legal challenges when buying an already established business for sale. Make sure you consider financial, legal, contractual, tangible and intangible intellectual property documents before making the final decision. You can also evaluate a business based on its turnover and expected cash flow to fulfil your entrepreneurial aspirations.