Due diligence is an investigation, or review performed to confirm facts or details of a matter under consideration. In the financial world, due diligence requires an examination of financial records before entering into a proposed transaction with another party.
The due diligence process would include getting answers to questions such as these:
- Does the business have healthy cash flow?
- By looking at the books, can you tell where the revenue stream is coming from?
- How reliable are its financial projections, and what multiple is it placing on those earnings?
- Are profits going up or down?
- How big is the market for the company’s products or services?
- Is the market growing, shrinking, or stagnant?
- Are there any major new competitors in the area or coming into the area that could negatively impact earnings?
- What kind of online presence does the business have, and how does it compare to its competitors?
- If the company has physical assets, are they valued correctly and fairly?
- Are there any hidden liabilities?
- Are the company documents complete? (for example, Articles of Incorporation, board meeting minutes, tax registration, etc.)
- Is the business up to date on its taxes?
- Does it lease property? If so, when does the lease end?
- What insurance information is provided, and what is covered?
- Are there complete employee files including salary and benefits?
Of course, this is a very short list of the due diligence that would take place before purchasing another business, but maybe you’re not in the market to buy a business. Maybe you’re planning to buy a new building or add a new vendor or product line. There are plenty of decisions you are likely to make where proper due diligence is key.
