Due Diligence for Business Acquisitions
When purchasing a business, the buyer must learn about all factors of the business in order to determine if the purchase is a sound investment. The process to learn these factors is called Due Diligence,
When purchasing a business, the buyer must learn about all factors of the business in order to determine if the purchase is a sound investment. The process to learn these factors is called Due Diligence, which basically means doing your homework on the business.
Scope of Due Diligence Varies Depending on the Specific Type of Business
The scope and magnitude of the due diligence research by a buyer can vary depending upon the exact situation of the purchase. However, in general, there are a few areas that should always be included in a due diligence investigation. To begin the due diligence process, typically, the buyer should provide the seller with a checklist of documents and information the buyer seeks to review. This article contains many suggestions for the buyer on what information is helpful to review.
From a financial perspective:
These are some of the documents you must take a look to have an understanding of the financial situation of the business.
- Income statements
- Balance sheets
- Cash flow statements
- Make a breakdown of real estate and equipment.
- Taxes compliance.
- Retrieve a summary of debts and their terms.
- Get a summary of all current investors.
Legal due diligence
Legal due diligence looks at legal contracts and other documents to look for hidden risks and lawsuits. Look at all copies of contracts, including:
- Purchase agreements
- Distribution agreements
- Sales contracts
- Employee and contractor agreements
- Trademarks, copyrights, trade secrets, and patents
- Articles of incorporation
- Business registration documents
- Labor compliance.
Additional Elements of the Due Diligence Depending on the Business
Depending on the sector of the business you are going to acquire, there are additional elements to consider that may not be required for other types of businesses. Such elements include:
- Environmental permits
- Waste management
- Specific licenses and permits
For people who are in the transportation business, it is required to have specific permits depending on what or who is being transported. If it is transportation for tourism, then a specific permit will be required.
Currently, there is a significant number of people investing in microbreweries for which is required to obtain a permit from SETENA mainly for waste management as well as the specific permit from the Health Department for the particular beverage to be produced.
- If the business is a hotel, then it must be registered with the Board of Tourism.
- If you are a real estate agent, you must get registered with SUGEF.
The list goes on and on. Make sure you are compliant.
Costa Rica requires that transactions regarding businesses need to be published and recorded. Article 13 of the Code of Commerce mandates the of publishing notice in the official newspaper, known as La Gaceta, whenever the creation, dissolution, sale, transfer, liquidation or modification of a legal business entity takes place. The purpose of this published notice is to make the transaction public knowledge in the event potential creditors have a claim on the corporation or for any other interested parties to appear. Furthermore, article 479 of the same law states that if a commercial or industrial facility or establishment is to be sold, a notice has to be published 3 consecutive times in the official paper, allowing creditors and other parties to appear in the 15 days following the first published notice.
The Hard Truth
Due diligence is time consuming, inconvenient, tedious, and sometimes expensive. However, upon completion of due diligence, the buyer should have the information required to make an informed decision whether to determine if the real value of the business is worth the purchase price. The details in diligence in these and other areas can provide a potential purchaser with the information needed to make an informed decision on whether to purchase a business by identifying what issues the purchaser will face in the future; the chances that the business will be a good investment and be successful in the future; and help determine what the business is worth. Ultimately, the buyer should know just as much about the business as they would want to know about their own business so that the decision to purchase can be made with confidence.