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So, what exactly is due diligence and why is it absolutely essential when purchasing a business? Due diligence is definitely the most important aspect of any buying transaction. It’s the span of time when you have unrestricted access to all company documents and records as a final stage to analyze the business and find any possible issues.

While the legal due diligence period usually starts after an agreement is made with the seller, to stay clear any pitfalls a buyer’s methodical investigation of the business should start the instant a business becomes of personal interest. And therefore, due diligence is an essential aspect of the buy a business process.

The due diligence process goes beyond a simple review of financial statements and tax returns. In actual fact, due diligence when buying a business involves every detail associated with the business in question.

The due diligence checklist starts with the information accumulation stage. This will give you the ability to determine pros and cons about the business. When active in the due diligence process, consider yourself to be a detective searching for every detail you can find out about the business. Before contacting the seller, do some basic information gathering using the Internet. As part of your due diligence checklist, search online records to learn what you can about the business you are interested in buying. Also do online research into the industry sector, suppliers, competition and the overall market outlook.

From the information that you’ve acquired, make a list of questions that have to be brought up with the seller. If you’re thoroughly satisfied with what the information is conveying about the business you’re considering, it’s a good time to go to the next stage of the due diligence process and approach the seller.

Due diligence when purchasing a business is incredibly important when making any sort of offer before the actual acquisition. At this stage, due diligence is essential when reviewing all the business records. As part of the due diligence process, write out a comprehensive list for the seller of all the materials you need to study. Then, create a timeline for yourself on what you plan to investigate, how long you plan to dedicate to each segment of the business, and which parts you are going to need professional advice, such as from a CPA or business lawyer.

While most sellers or brokers have a tendency to rush the inspection period of the due diligence process, always give yourself as much time as you think you’ll need. A minimum of a 20 business day duration is a fair period of time for the inspection review in the majority of contracts, but if you need more time, always request it. And remember, the formal due diligence process that is referenced in any business purchase agreement should not begin until you have all the materials requested from the seller.

Take all the time you need when going over all the business operations books, financial documents and tax records. Have your due diligence checklist handy to jot down questions, follow-ups and other things you need to check out with the seller. As part of the due diligence when purchasing a business, it’s normal to discover inconsistencies or potentially questionable items. Write them all down on your due diligence checklist and set up a meeting the seller when you’ve finalized your due diligence process. The information will help you build your case in determining whether renegotiation of the price, terms or deal conditions may be necessary.

If your due diligence uncovers some major problems and the seller declines to renegotiate the deal or fails to accept your solution, then you must have the right to walk away as long as the agreement has language that allows you to do so. Therefore, make certain any agreement you sign protects you during the due diligence period when buying a business or else you may have a major problem. In fact, business industry statistics show that 5 out of 10 deals fall apart in the formal due diligence process stage.

If after completing your due diligence checklist you are not 100% certain about buying the business, then you might need to investigate further or walk away from the deal. Consider what about the business is giving you an uncertain feeling. Perhaps you need to gather additional information. Or maybe your due diligence revealed areas of concern that make you feel uneasy. Or it could just be cold feet. If additional due diligence will not ease your concerns, then it’s best to walk away.

Due diligence when buying a business is all you have to go on in order to make an informed decision on whether or not to purchase the business. When conducted properly, your final decision should be an easy one.

Richard Parker is the President and founder of the Diomo Corporation – The Business Buyer Resource Center. His inspiring materials, seminars and consulting have assisted thousands of business buyers with achieving their life long dream of buying a business.