When you want to buy a business, doing your homework is crucial. To avoid an expensive post-transaction surprise, do a comprehensive examination of the target’s financial records, legal concerns, and market placement.
Due diligence also assists you in confirming your impression of the business’s overall worth to you, determining an acceptable offer price, and structuring a beneficial deal. Despite the stakes, many buyers fail to conduct thorough due diligence and ultimately regret it.
When the shoes on the other foot instead, it’s imperative that you should make sure that YOUR own business is ever ready for such practices when the time comes for YOU to sell your business.
When would due diligence take place?
Usually, the process of due diligence does not begin until you and the buyer have agreed on a price and terms. During their research, they may agree to remove the business off the market. This is referred regarded as an exclusivity period, and you might want a deposit to secure it.
The duration of the inquiry is flexible, although typically small firms require at least three to four weeks.
What to look for during your due diligence
Due diligence encompasses much more than a company’s finances. Buyers need to know exactly what they’re getting into, what has to be done, how much it’ll cost to solve it, and if you’re the ideal business that they are looking for.
Key areas of Due diligence
There are four forms of due diligence that a potential buyer would perform on your business. It’s possible that you’ll need separate advisers for each:
- Financial due diligence – Checking the statistics and making sure there are no black holes or hidden financial concerns is known as financial due diligence.
- Legal due diligence – Lawyers can ensure that the business has legal title to sell, ownership of all assets, and that regulatory and litigation problems are adequately resolved as part of a sales and purchase contract.
- Commercial due diligence – Which includes determining your company’s market position, examining rivals, and researching the regulatory environment.
- Reputation due diligence – Assess the positive and negative standing that your business has built throughout the years of operation.
The following key areas to cover for each form of due diligence are:
Financial due diligence
- tax liabilities
- an undiversified customer or supplier base
- poor product profit margins
- significant needed repairs
- old equipment
- sluggish inventory turnover
- slow-paying customers
- operational inefficiencies
- high employee turnover
Legal due diligence
- pending or threatened litigation
- employment contracts
- customer and client agreements
- laws and regulations affecting the company
- licenses and permits
- real estate and intellectual property issues
Commercial due diligence
- List of products and services offered and in development
- Long-term sales contracts
- Agreements with distributors, value-added resellers and dealers
- Present IT systems and other technology
- employment terms and conditions
- environmental issues
- commercial management (including customer service, research and development, and marketing)
Reputation due diligence
- Market research including size, share, trends, drivers, demand, conditions, opportunities, threats, differentiators and outlook
- List of top customers
- Profiles of major competitors
- Customer analysis including customer segments, demographics, churn rate, satisfaction, customer acquisition cost, NPS score and lifetime value
- A summary of all complaints or warranty claims
With all that in mind, you should be well aware and prepared for what potential buyers might find out about your business. That way, you’ll be able to tip the scale of leverage between you and your buyer. So, it’s always best to ensure that you have all your due diligence affairs in order well before the negotiation phase to maximise your initial asking price.
If you need professional help when it comes to due diligence you can opt to go through a solicitor for your business and choose an accountant for your business. Professional help is invaluable as you go through the negotiation, valuation and purchase process.
You can also access advice on buying a business through a business broker which are easily available.