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Due Diligence – in depth

Due diligence is the investigation you go through to analyse a business. That is, it will, once purchased, give you the return on your capital, you expect.

 

If you are doing your own due diligence, you will need the assistance of a CPA and a lawyer. If you have not owned a business of this type previously, it would be useful to ask a business broker to assist you. Not only will you likely obtain a lower purchase price, but also he is the experienced practitioner in that industry. He will save you time, money and likely get you into the best business that suits your needs and finances.

The business

  • The most important question you must ask yourself is: Is this the type and size of business you are really looking for? Is it within the parameters of your interests, your experience and your capital?
  • If the business is part of a franchise, does it restrict how you wish to operate?
  • Is the business up-to- date with all required permissions to perform the business functions?
  • Are there any procedure manuals or quality assurance programs in place?
  • Do you need any new licenses for the equipment and/or machinery? Are those licenses in place?
  • Is there a purchase agreement in place? Can you see it?

The seller

  • Ask for the reason the business for sale?
  • Ask the seller how the purchase price was calculated.
  • Longevity? How long has the business been established.
  • Is the seller cooperating and supplying you with all the relevant information?
  • Is the seller willing to sign a non-competing clause?
  • Will the seller stay on for a period to assist after you buy? If so, for how long?
  • Is the seller critical to the success of the business?
  • If the seller is the major manager of the business, do you have the personality, skills and managerial mindset to be his replacement?
  • Its essential you be allowed to work in the business for a period, sufficiently long enough to understand its workings. Establish the credentials of the accounts. I.e.  Check the validity of the cash flow.
  • Is the personality of the seller a factor critical to the success of the business?
  • What are the hours the seller puts in the day-to-day running of the business?

Competition

  • Where is the nearest competition?
  • Are the business prices competitive?
  • Is there room for expansion?
  • Are nearby businesses selling similar products?
  • Go talk to nearby competitors. Ask them if they would buy the business?

 

Industry/category

  • Is the business category/industry sector expanding, contracting or remaining static?
  • Is there likely to be greater competition in the near future due to deregulation?

 

Suppliers

  • Will existing suppliers continue to supply the existing products?
  • Have any suppliers been offering special conditions to the seller based on unwritten agreements? Are there any unwritten agreements with special conditions from suppliers? Will these continue?
  • Will suppliers give you the same discounts and the same credit rating?

Location

  • Is the reason for the sale the location? Or is the location satisfactory?
  • Are there any new business developments occurring near the location in the near future? Will these affect trade?
  • Is the business under a rezoning application?

Lease

  • Is there a lease currently in place? Can you continue the business under the current lease or do you need to enter into a new one?
  • Is there a new landlord in place? Have the premises recently been sold. Has the landlord changed recently? In which case this may indicate a change in lease terms, such as an increase in rent.

Staff/Personnel

  • Is the staff under contract? Can I see the contracts?
  • Does any of the staff require licenses?
  • Can I confidentially speak with the staff prior to the sale?

 

Assets

  • Is there a detailed list of fixed assets you are selling them with the business? Is there a list of assets not being sold?
  • Are these fixed assets included in the sale price or are they additional to the cost. If so, how are they being valued? Book value or actual value?

Stock/Inventory

  • Is all of the stock only from this business or is some included from the owners other businesses. Be careful that there is no slow moving stock items added from other businesses?
  • Has stock been correctly valued in the accounts?
  • Has an item of stock been sold but not shipped?

Equipment

  • Is the equipment in good working order? Is it up-to-date? Are spare parts available?
  • Is equipment owned or leased?

Income/Sales

 

  • Are all of the sales listed in the accounts. Does the owner take any money out of the ‘till’? Is this reflected in the accounts?

 

Expenses and debts

  • Does the business come with debts and any liabilities?

Expenses

  • Are all expenses shown in the accounts?
  • Has this business paid all the expenses out of its own accounts?
  • Has the owner been avoiding maintenance on equipment? Will you have to bring the maintenance up to date?
  • What are the annual expenses? When are they due?
  • Are the current maintenance agreements paid and when is their due date?

 

Debts

  • Is the business I am taking over liable for any debts? If so, what are the terms of the debts?
  • Will the cash flow be sufficient to cover debts?

 

Having covered all or some of the above items you are now in a much better position to determine if this business is for you.

I repeat, involving a broker will make your life much easier and may just save you a lot of heartache.

 

Featured Brokers

Advanced Business Brokerage Virginia, USA

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For more info see our Featured Advertiser Benefits.

 


February 1, 2010
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