Your Due Diligence Checklist for Buying a Small Biz
Your Due Diligence Checklist for Buying a Small Biz
February 8, 2023
Business buyers taking action
New Deal Tracker from our communities: Work in Progress!
So… About Last Night
We changed the name of our newsletter to “Boring Business Brief.” Sorry, we forgot to mention it.
Who knew monotony was so alluring?
Fear is a motherf@#ker!
Fear will stop someone dead in their tracks. Fear is the reason most people won’t hit their goals. Whether it’s personal, health, business or financial goals, people fall short all of the time because it’s scary to do the thing other people don’t have the guts to do.
Meanwhile, we’ve got some pointers for due diligence to help take some of the jitters out of your 7-figure business purchase.
The art of the ‘perfect’ deal
I notice most people fall into one of two camps on this. The first type charges in too fast without asking the right questions. (Not sure who would have done that? It’s me, hi.)
The second type talks forever about what they are going to do. Then they get ready to get ready. They stay busy looking at deals, but they just never find the right one.
The right deal exists. They’re just scared as shit. Fear is normal, but you get to choose whether you allow it to freeze you in your tracks, or you turn it into action.
You can find a reason to kill every deal, or you can find a way to make it work.
Some deals you should walk away from, some you should run away from. Some will be easy slam dunks. But most will land somewhere in the middle. How you handle the process of due diligence and ask the right questions will determine the strength of the deals you do.
Let’s assume you overcome the fear
So, you’ve decided to take the plunge and purchase a small business. Congratulations! This is an exciting move that comes with its own set of challenges. It also requires a great deal of due diligence on your part.
It pays to ask a lot of questions up front to make sure you’re getting the most out of your hard-earned money. To get you started, here are some questions you should consider asking before you make any commitments. Get the full list on our website.
What was the gross revenue over the past 3 years?
How much has the margin been?
What is the average profit for each product or service?
What is the current cash flow situation?
Have all local, state, and federal taxes been paid in full?
Is there any debt that needs to be paid off immediately after closing?
Are there any debts that will have to be assumed as part of the sale?
Do any loans need refinancing upon ownership transfer?
Is there an emergency fund set up specifically for unexpected expenses related to owning this business?
Can I get copies of financial records such as income statements, balance sheets, etc.?
Can I get copies of tax returns for both personal and corporate income taxes for three previous years prior to purchase?
Has a valuation report been done recently so I know what price range is fair when negotiating a sale price with current owners (if applicable)?
Have all accounts receivable been collected up until now?
Is there an audit trail showing accurate financials?
Assets, inventory and equipment
Do you have a list of all of the assets and inventory?
Are all the assets and inventory included in the asking price?
Are there any assets that need to be replaced soon after closing?
Does all inventory have proper documentation such as expiration dates?
Do you have maintenance records for all equipment?
If you could add one new piece of equipment or asset to grow the business what would your next purchase be?
How much do employees earn on average and how often are they paid (weekly, bi-weekly)?
What kind of insurance does this business currently carry (liability, property & casualty, worker’s compensation)?
Are all employees covered by worker’s compensation insurance in case of injury or illness on the job?
With my coaching and guidance would any of the current employees make a good Operations Manager?
Who are the 3 most important people on the team and why?
If you had to let go of one employee, who would it be and why?
How compliant are employees with laws and regulations?
Will I receive training from existing owners prior to taking over operations so I can learn first-hand how things work in practice and not just in theory?
Is there an employee manual that outlines policies and procedures?
Who is responsible for filing taxes for the current year?
Who will handle accounting duties once I take over operations?
Are all employees on a contract or are they ‘at will’?
What is the average length of employee tenure at this business?
How many employees? FT? PT? Contractors?
Are they aware of a potential sale? Would they be willing to stay on?
Who handles new hire onboarding processes?
Has any legal advice been sought in regard to intellectual property, customer information protection, etc.?
What are the core processes required to run the business?
Who is in charge of each process?
Are those processes documented?
Do clients pay regular invoices?
How long does customer service typically take?
How often does web content need updating?
Is email marketing being used?
Customer retention and feedback
Has reputation management taken place?
What feedback has come from customers?
Do customer reviews appear regularly?
Are customer loyalty programs offered?
Where do most of your current clients come from?
What is the average customer LTV?
What percentage of clients are return customers?
What percentage of your business do your top 5 clients account for?
Are there any pending legal actions against the company?
Are there any pending lawsuits against customers or suppliers?
Does this business require specialized licenses or certifications (such as food handling certificates)?
Have all licenses necessary for operation been obtained and maintained properly up until now?
Is my new role as owner going to require me to obtain special licensing or certifications prior to running operations effectively (such as food handling certificates)?
Does this business have contracts with other businesses (customers and/or suppliers) that may need to be renegotiated when ownership changes hands?
Are there any government regulations that must be adhered to when operating this type of business in my area (zoning laws, environmental regulations, etc.)
Does this business have patents, trademarks or copyrights registered under its name which will transfer over with ownership change hands (if applicable)?
Will customer information need protection?
Is online payment processing accepted?
Are there existing infrastructure systems (CRM, accounting software) that I need to be familiar with when taking over the business?
Is the current website secure from cyber attacks and hacking attempts?
Is the checkout process on the website user-friendly and efficient?
Are there any backups or redundancies in place in case of a system failure or data breach?
Does this business use any cloud services or online storage solutions for its operations?
Has an IT professional been keeping up with tech maintenance (patch updates, etc.) regularly?
Can sales commission be earned through referrals?
What digital marketing efforts are already established?
Can SEO efforts increase organic search results?
Does website design meet industry standards?
Should social media presence increase?
Obviously, this is not an exhaustive list. Every business has its own nuances, so some of these may not be required for each business. And some businesses may require categories we haven’t even discussed her
The goal of these questions is to get you thinking about how to de-risk the purchase of a small, profitable business with a thorough due diligence process. See more due diligence questions on our website.
Purchasing a small business can seem overwhelming at first, but asking questions like these can help ensure that you know exactly what you’re getting yourself into.
Plus, taking your time on the research can help make sure everything is in order before you close the deal. Having answers ready ahead of time about things like financials, liabilities and operations ensures smoother negotiations and transactions.
With enough research and preparation — as well as some serious dedication — you can overcome your fears and become a successful small business owner sooner than you think!