Preparing For Due Diligence: A Checklist For Business Buyers
When buying a business, it’s critical to get a proper scope of a company to decide whether it’s worth investing in. Due diligence is an important concept in the business world. It is conducted by business buyers before they purchase a business to protect themselves before a risky transaction. This can never be emphasized enough.
Due diligence is crucial — not just for business acquisition, but before any major transaction. However, a due diligence assessment can be overwhelming and it can be difficult to know where to start. In this checklist, we’ll go through each key aspect and how you can evaluate them accordingly to ensure you’re not making a transaction you’ll regret.
What is due diligence?
Due diligence is the process of evaluating a business before making a purchase to identify any potential risks but also to assess the company’s stability and potential for growth. In the context of business acquisition, due diligence is a decisive process to ensure that it is a good investment.
It involves reviewing financial and legal documents, assessing the management team and employees, evaluating the business’s operations, and analysing the industry and market trends. This process helps the buyer to understand the business’s strengths and weaknesses, and to identify any areas that may need to be improved. Due diligence helps potential investors to have a more accurate grasp of the business and what it can be capable of. With this information, you can be more confident of the value of the company and how it should be priced.
Overall, due diligence is a critical step in the process of a business merger or acquisition and it can help parties involved to avoid costly mistakes and ensure that they’re getting the best possible deal.
Finances and assets
During a business acquisition, it’s important to assess the finances and assets of the company. This includes reviewing financial statements, such as the income statement, balance sheet, and cash flow statement, to understand the financial health of the business.
It’s also important to look at the business’s assets, such as inventory, equipment, and real estate, to understand their value and condition. This information can then be used to evaluate the overall value of the business, ensuring you’re getting the best value for your investment. You should also pay attention to any debt or liabilities including loans, taxes, and other obligations. This aspect cannot be overlooked as it will impact the sustainability of the business’s operations and continue to grow.
Operations for Acquisition
The due diligence process will also assess what is in place for the operation of the business. This includes reviewing the business’s processes, procedures, and systems to understand how the business runs and how it generates revenue. Additionally, it’s important to evaluate the business’s products or services, as well as its customer base and target market, to understand its strengths and weaknesses.
This examines a range of factors associated with the company. It will investigate the business’s products and services, such as their place in the market, location of sales and the audience the business targets. It also takes into consideration internal values and culture — what are their values? How do they treat staff? What is their attitude towards suppliers and customers? Due diligence will also assess the supply chain, including the processes involved in manufacturing, distribution, and sales. Due diligence will highlight any concerns or gaps in operations that may prove to be a challenge later down the road, especially if you’re looking to expand.
This element involves the corporate framework of the business and assesses if it’s compliant with legal regulations. Not only does it review compliance with the law and industry standards, but it also includes compliance with labour and environmental regulations, as well as consumer protection laws.
It’s important to analyse the business’s licenses, permits, and insurance coverage to ensure that they are valid and up-to-date. The validity of any contracts, agreements, and intellectual property rights needs to also be prioritised. By assessing these concerns, buyers can identify any liabilities or legal risks that may complicate the transaction. Due diligence will easily flag any notable concerns, ensuring you dodge any precious acquisitions.
Management and employees
A good business is often reflected in how employees are treated. If a business accommodates a stable and productive labour force, it almost always guarantees success in the long term. Due diligence will investigate all aspects of staff infrastructure including the roles and responsibilities of key managers, and the business’s organisational chart. It’s also important to evaluate the business’s leadership team and employees, to understand the skills and experience of the people responsible for running the business. As a potential buyer, you should examine the business’s employee policies and procedures, including compensation and benefits, to understand the costs associated with maintaining the current workforce.
By assessing what is put in place for the protection of the company’s employees, you can gain a clear understanding of the business’s current operations and how it can be improved. It can also help to identify any areas for improvement, where efficiency or employee retention can be boosted.
By acknowledging the factors listed above, you will be prepared to understand any issues that may come up during due diligence. As a business buyer, you want to know that your money is going to secure a successful venture and the best way to do that is through due diligence. By taking these steps, you can reduce the risk in the transaction and ensure that you are making the right investment for your company. All of this information will be necessary once you decide to make an offer on a company and must prove to the other party that your offer is fair and viable.
Professional support from an accountant can make all the difference during a business acquisition. Wilkinson Accounting Solutions provides services specialised for a business acquisition or merger. Get in touch with us today.