Don’t Forget These Things When Doing Due Diligence

Have you ever heard someone say that they have to do their “due diligence” when looking into a potential business deal or investment or their future actions? Due diligence may sound like something you understand–but legally, what does it really mean to “do your due diligence?”

Due diligence doesn’t have one definition–it means doing and checking on a number of different things to ensure that you know what you are getting yourself into, and that you are making the correct business decisions.

But in the context of buying a business or perhaps, deciding whether or not to enter into a joint venture with another person or company, there are some things that often universally are considered to be due diligence-and some things that many people forget to do entirely:

Revenue and Income – For both the past and future, due diligence entails understanding not only what kind of income the company made, but also, whether or not conditions are such that the company you’re considering buying or doing business with, will continue to make that income–or more. You probably knew that already.

But remember to also look outside of the business you’re considering purchasing, to look at market trends–a pager company in 1999 may have been doing well, but due diligence would have told someone not to buy such a company, with the advent of cell phones on the horizon at that time.

Accounts Receivable – How much money is owed to the company you may be buying–and how collectible is it? How old is the debt owed; older debt is harder to collect. Do you have paperwork or contracts documenting sales, to document what is owed in the event you had to sue to collect?

And if there is a lot of money owed to the company…why is that? Is it something about the method of collection being used, or another problem that keeps people from paying the company (like a lot of disgruntled customers)?

Trade Secrets and Confidentiality – if you’re considering buying or doing business with another company, you’ll want to know what they have done to protect their trade secrets. You can imagine spending millions of dollars to buy a business, only to find out that their “secret sauce” is everywhere in the public knowledge, and you can’t do anything about it because the owners you bought the business from never had anybody sign confidentiality agreements.

And if you’re buying trade secrets as part of your purchase or merger, does the company you’re merging with, actually own those trade secrets? Or, do they belong to someone else?

Customer Lists – Does the company you’re buying own their customer lists? And if an employee leaves, who gets those customers? A list of a million customers is no good, if the company you’re buying has no way to prove that it owns, and has the rights to, those names and lists.

If you’re merging, doing a joint venture, or buying a business, or considering any kind of business transaction, get help with your due diligence. Call our Fort Lauderdale business attorneys at Sweeney Law P.A. at 954-440-3993 for help.