Due diligence. It’s the point in the business buying process where you start to really dig into the details (think contracts, inventory lists and the like). It’s a critically important step because it’s the step where you find out what you’re really buying. You should understand going in that you might come across some things that are less than ideal because all businesses are messy and complex. Absolutely every business has some sort of skeletons in the closet that will need to be addressed. Here are some common examples:

Long-Term Contracts

This could be anything from supplier contracts, employee contracts, your commercial lease and the like. You’ll inherit some of these contracts as-is and others (like your lease) will likely require some kind of renegotiation. Long-term contracts can be a problem if the owner before you chose (for example) a supplier whose products are inferior and/or more expensive than what you would have chosen but now you’re stuck. Although the supplier example here might not be ideal, the products are working as the business is able to remain operational – so you might just have to wait out the contract or find a way to buy yourself out. As far as your commercial lease is concerned, while you will need to renegotiate, you aren’t going to get a better deal than the owner before you. In many cases the rent will increase with a new tenant.  

Old Equipment

Once you really get into inspecting the equipment, vehicles, furnishings, etc. that you’ll be inheriting as the new owner of a business you might discover that these physical aspects are older and either need maintenance, repair or replacement. An important thing to remember is that most equipment doesn’t need to be brand new or pretty to do what it needs to do. It just needs to work. With that in mind you will probably be able to negotiate what you’re paying if the equipment you need is in such bad shape you’ll immediately have to replace it. 

Inflated Or Misrepresented Numbers

A cursory look at a single page P&L statement isn’t going to tell you much about how the business is actually doing. Neither will a simple chat with the seller. Once you really get into the numbers you might be disappointed that profits, margins and the like aren’t as good as you thought they were or were led to believe. The good news here is if the business isn’t making as much as the seller said it was you have a fairly strong argument for renegotiation to a lower price. 

The message here isn’t to immediately run away when you find problems during due diligence. Instead, look at the issues more closely to see if they are big enough issues to warrant action such as a renegotiation of your deal. 

Are you looking at businesses and want to know more about how to handle problems during due diligence? Do you have an experience to share where a business you were considering had much bigger problems than you were led to believe? Please feel free to leave any questions or comments, we would be happy to help.

Michael Monnot

941.518.7138
Mike@InfinityBusinessBrokers.com