What is the due diligence process?
Merriam-Webster Dictionary defines due diligence as “research and analysis of a company or organization done in preparation for a business transaction.” Ultimately, due diligence is the process of being sure that things are as they appear before a deal is finalized. The review of documentation and the answers to your due diligence questions are critical. There’s no doubt it is a complex process that can be time-consuming, but you don’t want to make a decision without all of the information.
During the due diligence process for the sale of a business, a list of documents should be provided. Depending on the size and complexity of the transaction, the list of documents should cover a range of areas, including:
- Legal structure and incorporation of the company
- Tax records
- Insurance policy information
- Organizational structure
- Personnel policies
- Capital and real estate
- Contracts, licenses, agreements and affiliations
- Technology and Intellectual Property
- Current or potential legal liabilities
- Marketing materials
While the financial aspect is a key component, the due diligence process should also consider organizational items. Be sure to seek documentation and ask important questions about the company’s culture, strategy, leadership and competencies.
Due diligence for the purchase of a franchise is slightly different and revolves largely around the review of the Franchise Disclosure Document (FDD), your interview with the franchisor and other franchisees, as well as your choice of territory(ies).
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