When you’re setting up a new business, or buying an established one, people always tell you that you should make sure you do your due diligence first. Makes sense, doesn’t it? You should know exactly what you’re getting into before you embark on any new business venture.
Having said that, you might not know exactly what corporate due diligence looks like and what checks you should be making. Here are some things you should consider when going through the business formation process.
What is the purpose of due diligence?
When buying a new business or entering into a business relationship with a partner, carrying out due diligence before making any permanent decisions is really important.
The purpose is to identify any potential problems at the outset. It lets you look more deeply than only publicly available information or what you’re being told. For example, if you are buying a business that on the face of it looks really healthy, a corporate due diligence investigation might show a completely different story. It can identify legal issues the company is facing, cash flow problems, and operational difficulties. Only when you’re in possession of this information can you make an informed decision on whether to get involved.
What should you look at in a corporate due diligence investigation?
There are numerous things that have to be examined, including:
- The assets and liabilities of the company.
- Company formation and history
- Financial information such as accountancy records
- Compliance and regulatory history
- Open-source research using social media and news articles
- Research the top two or three competitors in the market and see how they’re performing
- If the business is floating on the stock market, it’s a good idea to look at whether the price has been volatile or remained steady over the last few years
Whether you’re buying a business (or forming a new one) it’s vital that you know just exactly what you’re getting into. Having some support throughout the process can help you to make sure you’re protecting yourself legally.