Expenses and debts due diligence when buying a business
Due diligence for buying a business involves a detailed review of the business's costs and liabilities. If you don't comprehensively understand the business's debts and ongoing costs, you may be taking more risk than necessary. The due diligence process makes sure you are getting the most for your money—without receiving any surprises after you complete the purchase. It is a good idea to consult a professional adviser to help answer the following questions.
- Are all expenses shown? Will you, as the new owner, have the same level of expenses?
- Is there a chance the owner has paid expenses through another business?
- Has the owner avoided some expenses that could be delayed, such as equipment maintenance? Will you pay for poorly maintained plant later?
- Are there any annual expenses due soon?
- Are there new or increased expenses you should anticipate?
- What maintenance agreements are in place and what do they cover? Are they paid to the current date?
- What expenses do similar businesses have?
- Are some expenses prepaid by the seller? Will you have to reimburse the seller for your share?
- Are you responsible for any corporate body expenses related to the business?
- What effect would decreased or increased sales have on your costs?
- Do you know what costs are allocated to which product, and how a change in product mix would affect costs?
- Are there any ongoing advertising arrangements that you need to honour?
- Are the assets you're buying free of debts and liens? If you're taking over debts, what are the terms of repayment?
- Are there any contingencies such as warranties, court actions or guaranteed debts or accounts? Are you assuming any risk of being liable for the previous owner's actions (as might happen when buying a limited company)?
- Will your cash flow from operations be enough to pay your debts?
- Is interest paid for money loaned to the business?