Are you planning on buying a business?
If you’re an avid investor and someone not too keen on starting a business from the ground up, then purchasing an existing company that’s already profitable could be a great move. However, as attractive as it might appear, the importance of due diligence cannot be overemphasized. Just as you would never think of investing in the stock market without sufficient information or buy a property you haven’t carefully evaluated, the same holds true for buyers anticipating acquiring a business.
So, what are some of the top things buyers should know about due diligence?
What is business buyer due diligence?
As the buyer, the ball is in your court. You’re the one who makes 90% of the calls and ultimately has the final say as to whether the deal proceeds or not. Due diligence on your part involves the careful and thorough verification of all information provided by the seller and that your team collects from different sources. During this stage, a careful assessment is carried out to get a holistic overview of the business you’re intending on acquiring. The onus is on you to find any loopholes, discrepancies and potentially problematic areas in the business you wish to buy.
What to look for when carrying out buyer due diligence
Because businesses consist of so many different parts and entities, a checklist is often used to collect relevant information. This checklist is served to the seller and is basically a request for information about the business. This information includes financial reports, company legal documents, employee specs, operations, company assets, client data as well as particulars on the company’s products and or services. It is worth noting here that because of its complexity, buyer due diligence is a process that should be overseen by a competent business broker, your attorney, and accountant.
Without further ado, here are the five things you must know.
1. Cross-check all financial information
The number one thing you should never do when reviewing financial information you’ve received from the seller is to take what’s presented at face value. Even though everything looks good on paper, your accountant will need to go over the numbers to make sure everything checks out. This can be done in tandem with the seller’s accountant. What documents should be verified? Here are just a few:
- Financial statements posted in the last five years.
- Tax returns as well as the company’s credit report.
- Cash flow statements, income spreadsheets, ledgers and accounts receivables
- Associated debts in addition to contingent liabilities
- Product inventory, real estate and or company equipment
2. Review business operations and structures
It’s often said that a small leak is what causes great ships to sink. Robert Kiyosaki once said, “For a business to survive and thrive, 100% of the systems must be functioning and accountable. It’s not the systems that you know about that are the problem – it’s the systems you are not aware of that cause you to crash.” With that said, part of your buyer due diligence should involve a careful and deliberate analysis of the business’ structure, operations and systems. Metrics such as market penetration, industry trends, current competitors, customer base and operational costs are just part of the systems that need to be evaluated.
3. Enquire as to the existing contracts in place
Are there any contracts the business has in place with other companies that you as the buyer need to be aware of? These may be non-disclosure agreements, guarantees, stock purchase contracts, loans, leases, credit lines, mortgages, and or security arrangements. You need to have a comprehensive understanding of any and all of the legal obligations this business is involved in. Because when you acquire the business, you automatically inherit all this responsibility. Your attorney has to go through each of these contracts to ensure that they are all in order.
4. Verify provided customer information
Customers make a business what it is. Who are the biggest customers for the business in question? How often do they do business with this company you’re intending on buying? Is there a set protocol for acquiring clients? The seller should furnish you with all relevant customer databases as well as sale records. Communication and correspondence should also be availed to you as the buyer. Any ongoing litigation or legal cases should be highlighted and drawn to your lawyer’s attention. In this section of the checklist, we’ll include making sure the business has all the relevant professional licenses in place.
5. Don’t overlook the company culture
Company culture is such a pivotal issue that merits its own due diligence. Company culture cannot be overlooked especially in mergers and acquisitions because of its critical role in the success of the acquisition. People are not pawns that can be moved as you please. Both buyer and seller have a responsibility to employees on both sides of the spectra of being transparent and letting them know what’s happening. As a buyer, you’ll have to review employee packages, benefits, and incentives. At the right time, you’ll be given access to sensitive employee information such as tax forms, contracts, and payroll information.
Don’t navigate these waters alone
Due diligence can be a taxing affair. Fortunately, you don’t have to navigate the dangerous waters alone. Because of its legal complexity, it is preferable to bring on board a business broker that’s familiar with mergers and acquisitions. The team of Business Brokers at Sun Acquisitions have decades worth of experience and have been helping buyers and sellers close deals amicably. Together with your lawyer and accountant, you’ll be in a better position to discuss your concerns and find solutions for a way forward.