Due Diligence When Buying a Business


Savvy consumers always conduct certain research and inspections before agreeing to purchase an item of substantial value. This is because the duty is largely upon the buyer to assess the value of the thing he or she is buying. When a buyer fails to do so and accepts a bad deal as a result, the buyer is the one who suffers the consequences absent fraud or misrepresentation by the seller.

The same principles apply when buying a business, but beyond simply getting a bad deal, if agents or officers of a buyer company fail to undertake due diligence in investigating the value of the company to be acquired, they may be accountable to the company’s stakeholders as well. For these reasons, there are several things a buyer should do before completing the purchase of a new business:

  • Examine past financial records to determine true profitability
  • Inspect inventory to determine actual holdings
  • Investigate potential legal and contractual liabilities
  • Evaluate company’s current contractual obligations

Valuing a business involves more than simply identifying and appraising its physical assets, and relying on the representations of the seller alone is always risky. Even honest sellers may miss things and less honest sellers may neglect to disclose significant liabilities and other issues that could affect the purchase price.

Posted in Business Law | Tagged business transactions, buying a business, due diligence, liability

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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