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Due Diligence - Look Before You Leap in Business

By
Thomas W. Hartmann
The Hartmann Law Firm LLC, E-Mail
908 769 6888

 

Due diligence is the key to any business transaction. It is the business equivalent of "look before you leap." Due diligence involves the comprehensive review of a business to determine whether a transaction makes sense from every reasonable perspective.

Proper due diligence applies in business acquisitions and sales, but should also be considered before entering into major contracts, forming partnerships in any form or deciding whether to proceed with any major transaction - even purely personal transactions such as buying a home. The point is that due diligence helps you make an informed decision and avoids unnecessary allegations or disputes after the fact.

This is not to say that due diligence insures the perfect deal. Instead, due diligence helps a business decision maker know what is happening - good and bad - before any transaction is finalized.

Due diligence takes many forms and is transaction-specific. However, as a general matter it should include a review of assets and liabilities; profit and loss; major existing contracts of the seller; any prior, existing or anticipated litigation; the stability of management and employees; payroll practices; the customer base; the seller's history and reputation within the industry; any problems with the government or taxing authorities; insurance; or anything that might change negatively as a result of a purchase or sale. For example, sometimes, major contracts can terminate if there is a change of control or ownership.

You should also consider how changes you are considering will impact the business in the future, particularly in terms of cost savings, streamlining or reorganization.

Beyond these general areas, unique questions will apply to each potential transaction and each industry. Due diligence is specialized for an IT transaction, as compared to a construction, restaurant or franchise transaction. In some cases, you may also learn that regardless of your due diligence findings, the seller will make no adjustments. This is often the case in connection with a franchise purchase.

The point is that before one embarks on a significant transaction, whatever its form or purpose, it is reasonable to learn as much as possible about the party on the other side of the transaction. You will be saddled with your side of the transaction for a significant period and at potentially significant expense, so give yourself the benefit of careful, calm, detailed review in advance.

Consult with your trusted advisers, but also seek independent review through accountants, attorneys, and other specialists to insure you have carefully evaluated your business decision.

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