Some business transactions can result in a large profit over time. Though, they could also jeopardize the future of your company.

Market fluctuation, consumer demand and brand competition are some of the factors over which you have virtually no control as an entrepreneur. However, equipping yourself with as much knowledge as possible before entering into an agreement may be the best way to minimize risk.

Get the information you need to make an informed decision

Due diligence is imperative before completing a business deal. Whether you aim to form a partnership, invest in a startup or acquire an existing organization, you must understand what’s at stake.

Company culture is often indicative of the current leadership’s strengths, integrity and investment in the people involved with day-to-day operations. Yet, above and beyond interactions with the team, documentation will provide answers to many of your questions about the potential for long-term success.

For example, before you negotiate a deal, consider:

  • The company. Establish a baseline for growth potential by looking at annual reports. Ask questions about structure, stockholders and who completes outsourced work. Then research competitors’ expansion efforts.
  • Sales practices. Learn about your current customers as well as the entity’s advertising strategies, refund policies and purchase agreements. Allegations or legal actions related to the organization’s business practices may shed light on necessary rebranding efforts and resources.
  • Financial interests. Physical assets, tax returns and audits should support the profit and loss (P&L) statement. You can also gain a clear sense of cash flow through accounts payable and accounts receivable statements.
  • Intellectual property (IP). To what patents, copyrights and trademarks can the company claim sole rights? Study the work that stems from registered IP and evaluate whether the innovative masterminds remain with the organization.
  • Legal action. Depending on the industry, various permits, licenses and insurance policies may be in effect. Verify that the requirements are met and ask for clarification about any pending lawsuits, allegations or settlement offers.

In some cases, you might find that what you see is nothing like what your involvement would entail. Others may present a chance to seize the opportunity of a lifetime.

No matter which direction you take, base your decision on due diligence. This may not be a failsafe way to protect your interests, but it can help you build a foundation for what you should expect moving forward.