Financial due diligence is the acquisition deal vetting process. As a buyer pursuing Entrepreneurship Through Acquisition (ETA), you need to know if your target company is worth your time and investment. The way the seller pitched the business to you might not align with the story told by financials and other research into the business. Financial due diligence helps you understand the objective truth before making that all-important buying decision.

When buying a business, take time to review the company details to be sure it’s in good standing. Here’s what the process entails.

If you wish to own a business but don’t want to start from scratch, you may consider buying an existing one. This method of acquiring a business is an excellent way to capitalize on an established brand and operational infrastructure to potentially realize immediate profits. Buying a company might also be less risky than starting from zero, as you can skip some pain points.

You live by the LOI for months – make sure it outlines advantageous terms

The letter of intent (LOI) kicks off the due diligence process. It includes the purchase price, terms, exclusivity, closing conditions, and several other elements. Once the seller signs it, you can start digging into their business and finding out the information you need to close the deal. But if you want to get the most advantageous deal possible, you need to go in with a strong LOI.

Taking the right steps before and after you draft a letter of intent is critical for a successful deal

When you're buying a business, the letter of intent outlines the main elements of the transaction. It explains the buyer's and seller's expectations for and obligations to each other. The LOI holds the deal together and guides it to the next step — acquisition.

Assessing the margin, looking for missing expenses, and bringing in industry knowledge are key steps in analyzing the Profit per Product or Service in Quality of Earnings.

Entering into a business investment is no small feat. Aside from factors like your goals and budget, you have to consider how successful the business will be in the long term based on the information you have about its past and present.