Buying a Business in St. Louis: A Due Diligence Checklist
Have you ever dreamt of running your own business? St. Louis is the perfect starting point, with over half a million small businesses in Missouri.
But perhaps the intricacies and risks of building a business from scratch are too risky for you. There is another option, though, and that’s to buy an existing company.
When you do that, you’ll need to carry out due diligence. Here’s a due diligence checklist to help ensure you cover every check you need.
Business Fundamentals
You’ll want to check a few basics at the start of any due diligence process. The first is the business model.
The business model will tell you whether you are buying a business that can make money. Business models vary. Still, they all need to show you an operation that can solve specific market needs, making a profit along the way.
Ask questions about how the company adds value to a customer. Plus, it should outline how that business creates and delivers its products and services.
The next basic information you’ll want is the business’s profit and loss accounts. That will provide evidence about whether the business model is workable or not.
Finally, you’ll want to see a list of assets and liabilities. That will tell you how much value the business currently holds.
Legalities
It’s essential to grasp the legal framework surrounding a business acquisition. Otherwise, you could run into problems with the law or unnecessary costs.
First, check the company has the correct licenses and permits to operate in their industry. Second, ensure the company owns the intellectual rights to vital assets. That includes patents, trademarks, and copyrights.
Finally, check whether the company has any existing legal disputes, such as a dispute with a customer. It could leave you with potential costs or reputational damage. It’s essential to know about this upfront before making an offer.
Review the Management Team and Other Employees
Staff are the biggest asset of any company. Their talent and creativity is what can make a business grow. So check the teams as part of your due diligence.
Look at management roles and the background and experience of those individuals. Identify talent gaps in the group.
Examine employee morale. Check salaries, benefits, and retention rates. Look at what training the company offers to staff.
All this will show whether you’re buying a highly productive and motivated team when you invest in the business or whether there is work to do.
Review the Market
You want to know that you are entering a market that has promise. You’ll need a picture of the market profile and competitors. First, check the company’s share in the industry.
For a local business, examine by geography when you do this. Second, identify competitors and run a SWOT analysis.
Next, look at current trends. You want an industry that’s on the up, not in decline. Look at how demand has changed and any market innovations that could threaten the status quo.
Ask yourself whether there is room for expansion for the business, either into new markets or by launching other products or services.
Check Relationships With Suppliers and Customers
Good relationships are the glue that holds a business together. Any growing enterprise must have nurtured solid relationships with its suppliers and customers.
You can check this as part of your due diligence.
Start by reviewing customer relationships. Examine what customer service process is in place and statistics on customer complaints, issues, and public reviews.
Review supplier relationships to spot glaring problems like outstanding payments or late deliveries.
By reviewing both relationships, you can help prioritize any issues if you do take over the business.
Check the Company’s Online Presence
Most modern businesses have an online presence. For some, it’s central to their business model. For others, it’s mere marketing. However, reviewing all digital assets when buying a business is essential for all companies.
Check for a website and social media profiles. You should also examine the company’s branding.
Other information to review includes website traffic, social media numbers, and online reviews. You should check engagement statistics and conversion rates if it’s an eCommerce business.
Spot Red Flags
Potential red flags could show that a promising business could become a costly investment. Here are the red flags you need to monitor:
- Unpaid tax
- Pending lawsuits
- Potential lawsuits
- Repeated patterns in customer complaints
- Financial discrepancies
- High staff turnover
- Overdependence on one customer
- Overdependency on one supplier
- A recent change to the leadership team
In addition to this list, be mindful of anything else that looks out of place or gives you cause for concern. At the very least, do some further research to alleviate any worries.
Final Checks Before Signing
If you’re happy with all your investigations, you will want to progress to the signature process. However, this is also when you must run some final checks.
First, review the terms of the contract. If your due diligence found any concerns, now is the time to review those terms and ensure you are happy with them.
If not, you might consider renegotiating the price to reflect those issues you found. It will help protect your interests.
Take the time to review any last-minute disclosures from the seller. That can happen, and you shouldn’t shortcut the review process as those may be important issues.
Next, consider your transition plan and speak to the seller about how it will work. A smooth transition is essential because problems could damage your revenue, or you could lose customers or employees.
Finally, plan the communications for when you sign. Letting everyone know what’s happening as soon as possible is crucial.
Use This Due Diligence Checklist to Make the Right Investment
We hope you find this due diligence checklist helpful. Use it to ensure you make a sound investment and don’t regret your decision. Taking the time to check a company now will save you from problems later.
Are you ready to make the plunge and buy a business? If so, our business brokerage at Fusion is the perfect place to start. Browse our vast database of businesses for sale to find the perfect one for you.