Due Diligence the Right Way

Buying a small business is risky but if done right it can provide extraordinary returns.

Due diligence is a critical component to increasing your odds of buying the right business. Too many buyers get caught up in the "falling in love" phase and don't spend enough time checking for problems that the seller may hope you don't see before you get to the closing table.

Start with verifying that the sales the seller claims are generated by the small business are "provable".

Here's a list to start with:

1. Use the small businesses bank statements as a start. Make sure the "deposits' on the statements are all from money received from customers. A $20,000 deposit could be the seller had to put more money into the business, that is not sales income.
2. Check the tax returns to reconcile with the bank statements
3. Check the State sales tax returns (these are different from the Federal Income Tax Returns) to confirm the sales reported to the State are consistent with bank statements and income tax returns.
   

If all of these aren't reasonably close (within 1-2%) then there better be a good explanation!

Do your homework, you may need to kiss a few frogs along the way.