Preliminary high-level due diligence needs to be done up front and should commence with a limited, but thorough accounting and financial analysis. There should be a review of key documents, notably a profit & loss statement, a cash flow statement, a balance sheet, and a statement of retained earnings. Those are the basics, but it’s also vital to look at the overall performance of the business by studying historic trends and consistencies in the company’s recent performance. Depending on the nature of the company being investigated, it might be valuable to examine the accounts receivable, inventory and the value of land, buildings and equipment. Also use this as an opportunity to understand significant undisclosed pro forma activity (possibly having positive or negative consequence).
Also understand how the company has marketed and differentiated itself. Check out previous marketing tactics and strategies and analyze how that affects potential viability and profitability. There should also be some broad customer analysis looking at profile, demographics and local competition.
It is highly recommended to perform a site visit with the company. If a key central location exists, bring an expert, to ensure the basic systems—electrical, water, plumbing, heating and air conditioning—are in good working order and will not need to be replaced soon. Hopefully a seller already has available a list of significant capital improvements that a buyer will likely need to make to continue operating the business.