As they say in carpentry, “measure twice, cut once.”  In simple terms, it means that it is a good idea to do some investigation before undertaking an important task.  Yet, it is a constant source of amazement for me just how many people are willing to take tremendous financial risks with only hope on their side.

I often meet with people who have purchased a business, acquired real estate, loaned money or entered into any number of relatively large transactions without doing the bare minimum of investigation as to who they are dealing with or what they are getting themselves into.  There is a simple concept in the business world that apparently has passed many people by: due diligence.  The online investment dictionary, Investopedia, defines due diligence as follows:

1. An investigation or audit of a potential investment. Due diligence serves to confirm all material facts in regards to a sale. 

2. Generally, due diligence refers to the care a reasonable person should take before entering into an agreement or a transaction with another party.

The second definition hits the nail on the head.  If a reasonable person buys a business or some real estate, what would they need to know, at a minimum, before pulling the trigger on the transaction?  What I am finding is that many people are simply unreasonable when it comes to making business deals.  They allow hope to cloud their judgement about which deals are worth getting into.

As a rule of thumb, it is a good idea to have a lawyer, an accountant, an appraiser, an insurance agent and other relevant professionals (depending on the type of transaction) provide advice prior to committing to any large transaction.  For example, if you are purchasing franchise retail restaurant, you should have an attorney draft a purchase agreement with contingencies sufficient to allow you to back out with no liability in case of a problem.  You should have your accountant review the books and records of the business to help you understand the viability of the business.  You should have people inspect the real estate and machinery to determine if there are any issues.  You should examine the public record to determine if there are any liens or encumbrances (such as unpaid liens, taxes and so forth) affecting the property.

These things all seem like common sense.  Yet time and time again, I run into people who make enormous investments in businesses without looking into any of these things with any kind of seriousness.  Sometimes, they succeed.  Often, they fail.  Succeeding in business should not be an accident.  It should be the result of smart acquisition, shrewd planning and hard work.  You owe it to yourself to invest a little time and money determining if your investment is sound before plunging into a sea of uncertainty.

— Kassem Dakhlallah is a senior partner with At Law Group, PLLC.  His practice focuses on complex litigation, including class actions, representative actions, commercial litigation, civil forfeiture and personal injury. He can be reached at (313) 406-7606 and kd@atlawgroup.com.