Conduct due diligence to uncover potential red flags.

Once the Letter of Intent has been reviewed and signed by both parties, you can proceed to conduct due diligence on the business that you intend to buy.

This happens to be yet another business research procedure - but potentially more critical and detailed than the preceding initial review.

While initial diligence typically comes early in the buying process to provide an overview of the business performance, due diligence conducts a much deeper analysis of everything. The insights that you get here will help you make the final decision on whether the deal is worth it or not.

This is all thanks to the legal and financial documentation that you get to unlock after signing the LOI. This includes:

All the legal documents for any pending litigation.
Marketing and advertising materials.
Employees’ details.
Property documents such as commercial leases.
Business loan and debt disclosure.
Revenue specifics.
Up-to-date cash flow statements, balance sheets, and income statements.
Business tax returns for the past three years.
Company registration details and business permits - including business licenses, certificates of good standing, incorporation documents, etc.
A list of the business warranties and intellectual property.

Through these insights, your business broker, attorney, or CPA will be able to review and uncover even the hidden red flags. For example, they should have an easy time tracking down undeclared liabilities - such as paid-off out-of-court settlements and employee benefit claims.

All in all, new revelations at this stage are the primary reason why 50% of all business sales fall apart at the due diligence stage.

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