Only around 20-30% of business sales go through, and around 50% of the business sales that fail do so at the due diligence stage.
But what exactly is due diligence? And what due diligence needs to be done when buying a business?
In this article, we’ll talk you through the most important due diligence steps you need to take if you are merging with another company or buying a business.
What is due diligence
Due diligence is about verifying information given to you by the seller about a business to make sure you are not being ripped off. The business conditions must meet your expectations. Usually, due diligence takes place after you have already met with the buyer and reviewed the financials. By this point, you should be viewing this as an exciting and lucrative opportunity, and this should be your way of making sure that the offer is exactly as it seems.
If there are any problems discovered, this is when you would address them, either asking the seller to fix the issue, or renegotiating the price.
Her is our due diligence checklist.
1. Review and verify all financial information
You should have a business broker, and they should be reviewing all financial information on your behalf. They’ll be checking statements over the last three years, and have the seller explain everything to them in detail. Your account and the seller’s accountant will also meet to go over the numbers, analysing tax returns, debts and liabilities, and general cashflow.
2. Business structure and operations
Here, due diligence reviews the company’s future earning potential. You’ll review the business model, customer base, products, and services provided. You’ll also look at labor, materials, and operational costs. The aim here is to determine the company’s future, and how much work needs to go into making this a business that grows and continues to thrive.
3. Review and verify contracts
Here, you’ll want to know if the company has any partnerships or joint ventures with other companies, whether they have any loans or credit agreements with other companies, equipment leases, or other obligations you might be taking responsibility for when you become the owner. You’ll need to see all nondisclosure agreements, company purchase orders, letters of intent, contracts, agreements, distribution agreements, sales agreements, contracts between directors, and stock purchase agreements.
This is a laborious task, and again – a business broker can help you with this.
4. Customer information
You’ll want to know how you’re going to make money, so make sure you find out who your key customers are, what they’ve bought in the last few years, how they are acquired and retained, and whether they are on renewable subscription agreements or not. You’ll want to know how this business has been speaking to customers over time, how they have marketed to them, whether there are any research documents about customers, and if there are any pending litigation or threats of litigation.
5. Employee information
Sometimes businesses are worth more because employees are talented and worth a lot of money. You’ll want to know who key employees are and what their responsibilities entail. You’ll want to know if any employees are likely to leave the company, so that you can decide if it is worth offering them an incentive to stay.
6. Any legal issues
You definitely want to know if there are any outstanding legal issues you need to know about, as you will likely take responsibility for these if you buy a business. Nobody wants that level of headache as they begin.
7. Physical assets and real estate
You need a full inventory of what is included in the sale in terms of company property, and you’ll need to know its market value. This should include automobiles, equipment, and real estate.
8. Intellectual property
You also need to know about trademarks and copyright, patents and other exclusive intellectual information owned by the company.
Sales are complicated
As you can see, the purchase of a business is a complicated process, fraught with potential trip hazards. It is important that you employ professionals to help you navigate this difficult transition.
A business broker will most certainly help you to buy a new business, by conducting die diligence for you, helping to negotiate the price of the business, and even looking for a suitable business to buy. They’ll save you time and money, allowing you to continue your business as usual.
If you’ve bought a business, it is really important you employ a change management consultant to help navigate the process, as most business acquisitions fail, and you’re more likely to lose staff during the sale of a company than you are at any other time. Yorkshire Change can help.
To speak to a dedicated member of our team, call 0333 090 8710, or email chris@yorkshirechange.co.uk.