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Due Diligence Guide: Buying a New Business and Investment in New Venture

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Determination for buying a business can be broadly divided into three main categories – Legal, financial and operational. The most important of the three is OPERATIONAL. The business is expected to function as per the purchaser’s needs; this function is ensured by the operational part. The transfer of a business may cause deterioration of profitability due to lot many reasons. Discontinuing of the employees or the non allocation of the contracts, may be some reasons for the business to be aborted. These are true in cases of leases and indebtedness. However, it is also required by the buyer to make enquiries about the IP of the company.

Various documents that may be required to conduct due diligence before buying a new business include, labor agreements, collective bargaining agreements, personnel manuals and employee handbooks, loan documents related to indebtedness of the company, financing documents, list of directors, officers and key employees and their compensation, employment agreements related to directors, officers and key employees, including confidentiality or non competition agreements, intellectual property licensing agreement which includes software, patents, copyrights or trademarks, agreements with third parties including outside brokers, agents, distributors, franchisees, suppliers, vendors etc., IP Documentation including patents, trademarks, copyrights and other intellectual property owned or used by the company, Ownership of all domain names etc.

Many people are excited to invest in start-ups as they not only make profit but also help the debutant company making its mark. To get committed investors it is necessary to make the funds higher for the company. However, the fact remains that start-up companies, if not all, but fail. Some people promoting the investments are deceptive and only fiddle with the investor’s money and move to next attempt. A company with a super business model and elaborated plan can also defraud the investors. A smart investor needs to have important information about the start-up before investing.

Importance of company’s financial statements or offering memorandum: If the company refuses to show the memorandum, the investor should give it a no, as it shows that the company does not want to provide any information to the investors. A small company may not have a formal memorandum due to lack of money, in this case, financial statements can be asked for. For independent verification, an outside accountant should prepare the financial statements. For verifying the claims, taking a copy of past tax returns is also beneficial.

Importance of company’s business plan: A business plan is the company’s main asset which ultimately leads to the success of the company. It provides objectives of the company, details of the marketing goods and services and the resources required by the company. The investor should have a team of a corporate lawyer (specializing in business law), an accountant and investment adviser.

Importance of a Business Lawyer: an experienced business lawyer acts as a mediator between the investor and the company and helps in discussing main protections and better terms. Therefore, the deal can be easily negotiated between the investor and the company. Also, the economics and the legal terms of the transaction can be only understood by the help of the business lawyer.

To conclude, it can be aptly said that investing in a start-up business is not less than a gamble but a proper investigation and preparation can lead to a profitable journey.

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Contributors: Prity Khastgir and Rahul Dev

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