Due diligence is a key aspect of every complex business sale. It allows the buyer to verify the long-term viability of a company and determine whether to proceed with the transaction after carefully reviewing all possible liabilities. Due diligence reveals risks early on in the transaction and prevents unwelcome surprises later on.
This process shouldn’t take longer than one or two months – in the case of businesses with a complex structure. As is often the case, the buyer and seller will typically enter into a confidentiality agreement to ensure all information is kept a secret.
Due diligence is typically conducted over the following steps.
A Framework is Outlined
The business deal starts with the buyer and seller agreeing to a framework for arriving at a final agreement. The buyer should request for due diligence in their letter of intent. This will include a timeline for completing due diligence (15 working days – give or take), and a process for obtaining records, office spaces, and if needed, access to important employees.
Records are often accessible through an online portal. These will include:
The company’s business plan, articles of incorporation, sales strategies, ownership information, and more
Tax returns and financial statements
Financial projections and gross margins
Description of regulatory, tax, and legal issues affecting the business
Details about third parties and vendors working for the company
Due diligence also includes an in-depth inspection of buildings, equipment, as well as interviews of key personnel.
Important Team Members
Due diligence should be carried out by qualified people from different backgrounds. This includes a financial expert who specialises in business acquisitions and will analyse the company’s financial records. A lawyer will inspect the company’s legal issues. In some cases, the legal review process may require specialized counsel on important issues, such as real estate assets and intellectual property.
Other experts include IT specialists who analyse technological assets or environmental experts to study hazardous materials.
Conducting Due Diligence
Studying the financial records of the business is an important step in completing a successful acquisition. An experienced accountant will go over the company’s budget, projections, statements, and other records to analyse the assumptions behind them. The goal is to ensure the numbers add up and that the company is worth the price tag.
The accountant may also uncover important issues such as:
Tax liabilities
Undiversified customer base
Old equipment
Unreliable customer
Operational inefficiencies
High employee turnover
Poor profit margins
Significant repairs
Evaluating the Market
This step is often overlooked in due diligence but it plays a major role in the long-term viability of the transaction. This process takes a look at the company’s positioning in the market, industry trends, and assumptions behind projections as well as possible risks in the future.
A good rule of thumb to identify the company’s growth potential is to evaluate consumer interest in its product and services.
Wrapping Up
Due diligence is a painstaking process if done properly. If you are doing due diligence on a business, that means you have already made a decision to buy the business, the price is agreed upon, and the sales and purchase agreement is signed. The main purpose of due diligence is to investigate the business and verify the information that has been provided during the marketing. An experienced business broker can make this process smooth by accessing the required details in a timely manner, guiding the buyer and the seller through the process and most importantly making a plan to achieve a positive outcome for both parties.
If you are looking for an experienced business broker to sell your business or to help you to buy one, contact me, Serdar Kabul for a free no obligation chat.