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Due diligence checklist

After signing an agreement in principle, you need to conduct a comprehensive MOT.

On first encountering the phrase 'conducting due diligence', it may sound like legal jargon best left to your solicitor.

However, it is simply business shorthand for  'gathering information and thinking things through' when it comes to buying a business.

A period of due diligence is the time when a prospective buyer can investigate and evaluate any facet of the business. As the buyer, you have the right to look at the records, assets and operations of a business before you make that all-important decision and sign on the dotted line.

Due Diligence usually starts after both parties have agreed a deal in principle, but before the signing of a binding contract. The length of this period is negotiable but should last at least three or four weeks to reap the maximum benefits.

It's handy to employ both an accountant and a lawyer to help you with the process.

So what should you be looking at when you're conducting due diligence?

To start with, get in touch with Companies House, where all limited companies in the UK must register. It holds information on over two million firms in the UK and you can access a business's latest accounts, annual returns and company reports.

As the buyer, you have the right to look at the records, assets and operations of a business before you sign on the dotted line

Also, you should examine the following areas while conducting due diligence and dig as deeply as you can.

Firstly, look at the personnel of the business and any other human resources issues. What are the terms and conditions of employment? What skills and experience do the staff have?

The financial operations of the business will be of crucial importance. Study the company's books and records and its accounting and bookkeeping methods. Look at the cash flow of the company, both past and projected. It will also be useful to look at how relationships have been cultivated with banks and lenders along with the debt of the business.

Consider the services and products the business offers, and the pricing in comparison to the industry standard and competitors.

Always check out the assets of the business, the property and equipment. Look at leases and deeds and then investigate the depreciation of property and equipment values.

The operations of the company are worth looking in to. Take into account the location, inventories, suppliers, management, customer relations and insurance policies.

In addition, look out for outstanding litigation, major contracts and orders, IT systems and technology, environmental issues and commercial management including customer service, research and development, and marketing.

When you're buying a franchise the process should be pretty similar. But the franchise salesperson or broker who you have been dealing with will more than likely have a vested interest in getting you to buy, so a period of reflection and investigation is crucial.

Internet research

Start on the internet with some research. Look for any article on the franchisor that you can. Also, examine the industry and ensure that you know as much about it as possible. Begin to look at the competition and pick out strategies and trends in the industry.

Finally, it's always worth meeting up with an established franchisor to gain knowledge.

The lengths you go to when conducting due diligence are based on many factors, including the size of the transaction, time constraints, cost and availability of resources. Of course, it is impossible to know every last detail about a business, but it's crucial that you learn enough to make good, informed business decisions, without overdoing the process. You don't want to end up with 'analysis paralysis', having over-analysed the business during the due diligence period.

In short, conducting adequate due diligence will protect the buyer from a range of problems and avoid any skeletons in the closet. Examples include finding that the purchase price is too high, discovering there is pending legal action, revealing misunderstandings about the condition of the business and uncovering an unfavourable financial situation. Or, in the case of franchising, realising that you may have chosen the wrong industry. It is an invaluable process and one worth taking care over. 

Vickie Lamb

About the author

A graduate of PMA Trainings intensive journalism course, Vickie has worked at Precision Marketing as well as doing freelance work for Dynamis.

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