If you’re looking to buy a business, this is no doubt an exciting time. Perhaps you already have a business in mind, or maybe you’re just decided it is time to take that all important next step, and you’re out in the market looking for an ideal candidate. This is such a thrilling experience and we are absolutely sure you can’t wait to get started.
But that doesn’t mean that you should go mad. This is probably one of the biggest decisions you will ever make. You really need to take your time and do your due diligence. It is important you know what to look out for, and that you do your checks properly.
In this article, we’ll discuss the types of due diligence you need to do when buying a business.
What is due diligence and how does it relate to buying a business?
Due diligence describes the process undertaken by anyone about to enter into an agreement. Basically, it is the careful research you should perform before you buy anything or sign something. It is a process of making sure you know exactly what you are agreeing to and, as you can imagine, it is more important in business than it is almost anywhere else.
You wouldn’t want to buy a business and then find out it is in millions of pounds worth of debt, for example. Or that the staff are so unhappy they are about to walk out. Or that there is no way of merging your existing business with the new one, even though that was the entire intention of your purchase.
A due diligence process will make sure you know everything you need to know so that there are no nasty surprises.
At the very least, you will need to investigate a company’s organisational structure, product lines, property (both physical and intellectual), and any other business relationships or obligations it might have (such as contracts with other companies or money it owes out to other people).
Due diligence is not the first stage of your buying journey. You should already have a good idea as to whether the company is a good fit for buy. It is, however, a more in-depth look at the organisation, so keep your eyes peeled for skeletons in hidden closets.
Types of due diligence
There are three major types of due diligence you should be aware of when you are thinking of buying a business. They are:
- Legal due diligence – this is when you check that the business is allowed to be sold, who owns the assets, and that regulatory and litigation issues are fully addressed. You will need a lawyer to help you with this. Don’t try to do it on your own.
- Financial due diligence – this is where you check that the financials are as they should be, and there is no hidden money or black holes. You’ll likely need an accountant to help you with this.
- Commercial due diligence – here, you’ll make sure that the company you are buying is commercially viable. You’ll either want to increase your revenue or perhaps you want to create a synergy with an existing company you own and so curb spending. Doing your commercial due diligence will set your mind at rest that the things you want to achieve are possible.
Basically, the point of due diligence is to make sure that the company you are thinking of buying aligns with your ambitions for the future from a legal, financial and commercial perspective.
What should I examine when doing due diligence?
A professional will be able to help you with this, but on a very basic level you should be looking into;
- outstanding litigation,
- the terms and conditions of employment,
- major contracts and orders,
- IT systems and other technology,
- environmental issues,
- commercial management.
Basically, you are looking for anything that might stop you trading or cause you issues in the future.
A change manager can help
You should be aware that due diligence is necessary and complicated. Missing out on any part of the process could be extremely costly in terms of time and money, so it is a good idea to get a professional to help you with it.
A change manager can help you with this process. You can bring them onboard from the very beginning, and they can help you scope out potential businesses to buy if you don’t already have one in mind.
They’ll make sure the right people are in place and that due diligence is conducted properly, to significantly lower the chances that something goes wrong or an element is overlooked.
Our dedicated team at Yorkshire Change would love to assist you. For more information, call 0333 090 8710, and we’d be happy to talk through due diligence and your options.