Due Diligence is when the buyer reviews all aspects of the company to uncover any warts, wrinkles, and….skeletons in the closet. No bones about it, this step is necessary in evaluating what risk is involved for the buyer in making the acquisition. Skeletons found in due diligence, however, should not normally break a deal but they will be negotiating points on the way to an agreement.

The following are issues that can rear their ugly heads during the due diligence investigation. The issues could be related to your financial information, equipment or real estate, inventory, accounts receivable, intangible assets (patents. etc.), employees, customers or suppliers. The problems might concern legal, accounting, tax, regulatory, industry, technology, operational, competitive, corporate records, product, product liability, contract, partnership, leases, licenses, employee benefits, insurance, or debt issues, etc.

This list is a compilation of potential problem areas and may not apply to all types of businesses. It is not meant to be all-inclusive and is in no particular order:

• Accidents
• New competition in the market
• Changes in technology
• Equipment obsolescence
• Liens on the business
• Business licenses are not current
• Facility obsolescence
• Market shifts
• Declining Revenues
• Poor Financial Records is one of the biggest reasons businesses do not sell or sell at a value considerably less than market value
• Low margins
• Capital improvements needed
• Lack of Supplier Diversity
• Lack of Customer Diversity – If too much business is concentrated in too few customers, the risk factor is increased. Should one or more of the customers discontinue patronage of the firm, revenues will be seriously impacted.
• Uncollectible receivables
• Low backlog
• Restricted credit
• Regulatory violations
• Environmental Issues are of concern because it is possible that any and all former owners can be held accountable by the government for very expensive cleanup costs.
• Insurance Cost and Availability
• Slow Moving, Outdated and/or Excessive Inventory – These types of inventory tie up money and make the business difficult to sell. Buyers will refuse to buy or will deeply discount the value associated with these types of inventory.
• Obsolete marketing collateral
• Key Staff Leaving
• Staff that are undocumented or categorized incorrectly (i.e. 1099 vs. W-2)
• Poor Property Lease Terms – Not having a lease or being locked into a lease with onerous terms, such as high escalations, detracts from the value of the business. Not having a lease to assign to a buyer runs the risk that the landlord will increase the rent for the new owner. If the rent goes up, the earnings go down and consequently the value of the business goes down.
• Product liability claims
• Patent expirations
• Sales contract expirations or unassignability
• Cash flow problems