How to Conduct Due Diligence

You have 60 to 90 days to make sure that no hidden time bombs are ticking away in the business you are about to acquire. Ready, set, go! Such is the proposition of due diligence.

The process kicks off when both the buyer and the seller sign a letter of intent, or term sheet, which sets the starting purchase price for a deal. By signing the letter, the seller agrees to open up his or her company to a top-to-bottom audit by the buyer and adjust the sale price based on the audit's findings. Here's what to keep in mind:

1. It's about managing risk. Double-check financials, tax returns, patents, and customer lists, and make sure the company does not face a lawsuit or criminal investigation. And be extra cautious if the company has never undergone an audit from an outside accounting firm.

The company's customers can also be quite informative. Ask the sellers for a list of their most favored clients-and then call the customers that didn't make the cut. ...