DUE DILIGENCE: WHERE TO BEGIN?

by | February 11, 2014

Blog written by Robert Burger, B2B CFO

BUYING A BUSINESS IS EXCITING – AND DAUNTING

The initial reaction to finding a potential business to purchase is excitement, and it’s filled with possibility and plans. In order to avoid making an emotional commitment that clouds our judgment and leads to a whirlwind business romance, it’s a good idea to have a plan in place for scrutinizing the business in a structured manner. After the initial evaluation, every business sale goes into the Due Diligence stage.  This can be somewhat lengthy when done thoroughly and requires tenacity to complete, but it will be well worth it when you take the keys. The following is an introduction to the areas that you will typically want to include in Due Diligence. The ability to track this process and manage the responses will be one of your greatest tools in ensuring that you have the best possible experience is you decide to take the plunge.

DUE DILIGENCE – GENERAL

  • Why is the owner selling. Are they slowing down, or is the business slowing down?
  • What has been the overall growth /profitability trend. Is it promising or frightening, and can the buyer improve it?
  • Where will growth come from. Better sales and marketing plans, product expansion, geographic expansion, strategic alliances?
  • What is the outlook for competition and pricing. What is the current industry landscape, and what’s over the horizon?
  • What is the outlook for technological change and obsolescence. How have similar businesses been impacted?
  • What is the outlook for regulatory/legal change. Who can you turn to for expert analysis of this complex area?
  • Where will new employees come from. Is there a ready supply of qualified workers, and will you have to compete for them with larger companies?
  • What are the overall competitive advantages. How sustainable are they?

DUE DILIGENCE – SPECIFIC OPERATIONAL AREAS 

  • Management and employees. Who will you need to retain? Or replace?
  • Product and service lines. Do you know which are profitable, which are extendible, which are fading in value?
  • Competitors. What do you know about the specific competitors, their strengths and weaknesses, and the won-lost record when bidding against them?
  • Customers. What do you know about specific customers, the number and size (if businesses), how much revenue is derived from the top 5 customers, how healthy the customers are financially?
  • Key vendors and service providers. Are vendor relationships healthy, are there multiple vendors so supplies are assured, is pricing competitive?
  • Fixed assets. In addition to age, condition and required maintenance, how much capacity for growth is there?
  • Inventory. What is the age and turnover, how well is it tracked, is storage appropriate and secure, with room for growth?
  • Intellectual property. Is it identified and protected? Will you acquire all rights to it? Is it a sustainable advantage?
  • Technology, hardware and software. Can you get a thorough review of the functionality, reliability, security, and scalability? Are all licenses current?
  • Marketing, brand recognition. Does the business have widespread recognition? Is it positive? Can you envision the products and services as leaders in the industry?

DUE DILIGENCE – FINANCIAL AND LEGAL

  • Insurance.
  • Contracts.
  • Legal and regulatory compliance.
  • Environmental issues.
  • Three year (minimum) financial performance: P&L, Balance Sheet, Cash Flow.
  • Banking and Financing agreements, liens.