Due Diligence

"Due Diligence” means a systemic process of investigations, conducted by the Buyer and Buyer Representatives for the subjected or intended business planning to Purchase. Both Buyer and Buyer representative’s motto is that they want to make sure that all the facts regarding the business are available and have been independently verified.

This is the first step in the process of buying a business investigation. The buyer personally sits with seller and reviews all Financial (such as profit and loss statements, balance sheet, state, federal, sales, ust, city, pay roles taxes, special and local taxes etc), Lease, License and Permits Status, Reports such as invoices, Paid In & Paid Outs, shift sales reports, daily sales reports, monthly sales reports, and yearly sales reports, and Business Bank Statements. The buyer will go through all of these documents and seller will explain for all Buyers questions and concerns. Both buyer and seller will walk through the premises and do the visual inspection. It is always good idea to have a meeting between the buyer and seller in the presence of their authorized agents.

This is one of the key investigations in the process of the due diligence. The CPA or Tax Consultants will conduct a Financial Auditing.

• Read and review the last 3 years Federal Taxes, State Taxes,
• Read and review the Sales Taxes, UST taxes, City and Local Taxes and verify this with Bank accounts or confirm with canceled checks,
• Read and Verify all the invoices, pay in & pay outs of the business for the last 3 years,
• Read all sales reports generated from the POS and verify with tax reports, bank statements for the depository slips etc.,
• Read and review the Balance sheet and Profit and Loss statement of the business for last 3 years,
• Review the current Year Profit and Loss statements,
• Analyze the cash flow of the business,
• Review the current assets, liabilities and the values of the business,
• Compile all the records and give the summary on the cash flow and comments on the Business Financial Audit report with all necessary recommendations.

This is the third part of the due diligence. The Appraisers are licensed professionals specialized in the valuation of the business. They do various industry approved methods and tools to get the value and worth of the business. In order, to get the value commonly, they use following methods. Here are following things do and verify by appraiser.

Reviewing and counts the Business Tangible assets such as Furniture, Fixtures & Equipment etc. Find outs the Cash flow of the Business based on the sellers business financials. Net Operating income, Debt service, and Discreet profit or loss, Factors effecting the current earning and future earnings. Reviewing the Lease copies, and all other supplemental or associated agreements impacting the business Current zoning, neighborhood, new developments and future impacts of those changes. Employee role and owner impact on the business. Types of Operations, Facilities of Operation, Service of Business and Hours of Operation. Condition and viability of the Business. CC&R and Status of Licenses, Violations, Restrictions of the Past, Current and Future Impacts etc.

The Appraiser uses the following methods to get the valuation of the subjected business.

• Asset Approach: This is the Fair Market Value of assets of the business, in this the appraiser will use either Going Concern Asset Based Method i.e. lists the business net balance sheet value of its assets and subtracts the value of its liabilities, or Liquidation Asset-Based Method determines the net cash that would be received if all assets was sold to pay off the liabilities or the Current.
• Income Approach: The appraiser uses the current business cash flow, and calculates the debit service coverage, Rate of Return, Rate on Returns, Cap Rate, and future earnings of the business etc.
• Market Approach: The appraiser uses this method to compare how many similar businesses were sold and what price range it was sold, how long they are in the market, Type of selling etc. Generally, this will give valuations and sales trend in the given geographical area.

With this, you know what you are buying, what is the Value and Worth of business and also the nature, risk and viability of the business.

This is one of the Paramount important investigations done by the attorney. The attorney will read the current lease, options, your duty as less and Lesser control on the premises, types of operations, hours of operation, future additions or deletions of business model, expansions, current agreements with the business, such as equipment lease agreements, oil supply agreements, indemnity agreements, franchise agreements, Vendors and Suppliers agreements, current seller notes, and business title reports, merchantability of titles, transferability of license and permits, works agreements, insurance over ages, Seller carry note terms and conditions and preparation of notes, lender notes, look for any successor liabilities issues etc..

These is one of the other professional associated with business on and off, such as the General Contractors to see whether the fixtures up to code, or the business area equipments is whether up to the code or not, and also to see the conditions of the equipment, The Insurance Broker to see is there any climes in the last 3 years either by the seller or third party, and what kind of insurance currently have it and what need for the future coverage, etc.

Business Owner Ship Documents. Financial Information for last 3 years with current update statements. Physical Assets. of the Business. Intellectual Properties if business have any. Employees and Employee Benefits. Licenses and Permits. Including canceled one in last 3 years. Material Contracts Such Leases contacts, equipment lease contracts, Indemnity supplying contracts Franchise agreements etc. Businesses products and services list including operational methods. Customer Information such as deposits, accounts, etc. Litigations of the Business such as Judgments, violations etc. Insurance Coverage current coverage and any previous claims. Contact information’s of all concern departments.

This is a general list only i.e. Not a Total List. Each business has their own requirements you can talk with your Broker / Agent or Representatives what you need exactly need for your due diligence