As you prepare to purchase a business, you must perform due diligence when it comes to reviewing and researching all available information related to that company. The goal with this research is to ensure you will not be surprised by any financial or legal issues if you decide to go through with the deal.

Below are some of the specific considerations that you should focus on while conducting due diligence:

Finances

Review all the audited financial statements you can get your hands on. You should also carefully analyze balance sheets, cash flow statements and income statements, along with any tax returns filed within the last five years.

In reviewing all these documents, you should be able to determine whether the business was collecting its accounts receivable in a reasonably timely manner, if it was paying off its debts, the kind of margins it was running, how much bad debt the business was writing off and whether there were any outstanding liens on the company, among other issues.

Legal issues

Analyze all the company’s professional and consulting agreements, licenses, permits, insurance policies, lawsuit-related documents and any documents related to intellectual property. It’s important to be sure all existing agreements are enforceable, that the company has the rights to its intellectual property, that the business has been appropriate insured and that all licenses and permits are current.

It is also good to get a heads up about any pending legal action involving the company.

Structure

The structure of the business could affect your decision to purchase it. If it is a corporation, for example, you should ask for a copy of the bylaws, articles of incorporation and meeting minutes from shareholder or board meetings. You specifically want to make sure the business complies with all regulations relating to its structure, that the business structure is in line with your plans for the company and if you will need to buy out any shareholders after making the deal.

Employees

Get copies of employee handbooks, agreements, wage information, benefits plans, non-compete or non-disclosure agreements and any other contracts the company has with its employees. You should be on the lookout for any ongoing disputes with employees or whether existing policies make it more likely that employees will sue the company at some point. 

Operations

Get lists of all customers, vendors and suppliers, along with any operations manuals the company might have. Using this information, you can consider the types of inventory systems the company has implemented, the diversity and growth potential of its customer base, the type of equipment and infrastructure the company has in place and how much diversification is in the company’s supply chain.

For further guidance on due diligence before buying a company, work with a skilled U.S. Virgin Islands corporate planning attorney.

 

Steven K. Hardy is Chair of the Corporate, Tax and Estate Planning Practice Group at BoltNagi, an established and respected business law firm serving clients throughout the U.S. Virgin Islands.