Having a signed Letter of Intent is important when it comes to your deal being completed. It is vital to remember that the deal isn’t done until many items have been completed.
The due diligence process should not be overlooked. A buyer decides whether or not to move forward with a given deal during the due diligence period. Depending on what is discovered, a buyer may want to renegotiate the price or even withdraw from the deal altogether. Both sides in the transaction need to understand the importance of the due diligence process.
There are several steps buyers must take before the due diligence process begins. Buyers need to find experts to help them. These experts include appraisers, accountants, lawyers, environmental experts, marketing personnel and more. Often times buyers fail to add an operational person, someone familiar with the type of business they are considering buying.
Due diligence involves both the seller and the buyer. Below is an easy to use checklist of some of the main items that both buyers and sellers should consider during the due diligence process.
Industry Structure
Understanding industry structure is fundamental to the success of a deal. Take the time to determine the percentage of sales by product lines. Review pricing policies, consider discount structure and product warranties and when possible, check against industry guidelines.
Balance Sheet
Check accountants’ receivables closely. In particular, look for issues such as bad debt. Discover who’s paying and who isn’t. Also, be sure to analyze inventory.
Marketing
Get a list of key customers as soon as possible.
Operations
Make sure you understand the current financial situation of a business. Review the current financial statements and compare it to the budget. Checking incoming sales and evaluating the prospects for future sales is a must.
Human Resources
Don’t overlook the human resources aspect of due diligence. Review responsibilities of the key management staff.
Other Considerations
Other issues that should be taken into consideration range from environmental and manufacturing issues (such as determining how old machinery and equipment are) to issues relating to trademarks, patents and copyrights. For example, are these tangible assets transferable?
Ultimately, buying a business involves a range of key considerations including the following:
- What is for sale
- Your company’s competitive advantage
- Barriers to entry
- Assets that can be sold
- Potential growth for the business
- Whether or not a business is owner dependent
Proper due diligence takes time and effort, but in the end it is well worth it.