The Due Diligence of Buying a Business
We’ve all heard the old adage…The devil’s in the detail!
That certainly is true when analyzing the merits of buying a business. It’s a process requiring proper due diligence to mitigate unforeseen liabilities. An article by International Accounting Firm Mercer & Hole listed key areas of potential risk and exposure that must be considered when making an acquisition:
The Employee Pool
Is the number of employees adequate for the business? How might an acquisition affect churn and associated replacements?
Contracts and Agreements
What are the loan and credit agreements? What contracts exist with suppliers? Are there employer contracts? Does change of ownership require contractual approvals with other parties?
Intellectual Property
Are there any ongoing IP litigation or disputes? Are there any liens or encumbrances on the IP? Are there company trade secrets that need protecting?
Customers/Sales
How will existing/new customers respond? Look at the customer satisfaction rates and levels of returns to gauge (estimate) customer retention levels after the acquisition.
Competitor Analysis
Analyze where the company is in relationship to its competitors. Is this company a leader in its market? Or will the purchase require future investment to maintain existing sales levels or increase its market position? How will the purchase affect stock value and will it result in adverse (or positive) social media buzz?
Environmental Issues
Are there any hazardous substances or EPA/OSHA investigations ongoing? Have the health and safety and fire risk assessments been kept current to avoid any criminal investigation or fines?
Litigation
Is there any pending litigation? Are there judgements outstanding, statutory demands or any prior notice of intention to take control of goods?
While this is only a brief overview of the considerations needed in any acquisition, the real point is this; any due diligences must analyze potential risks and exposure associated with the purchase. It will be time well-spent and may affect the negotiated purchase price for the company.
As a leading executive recruiter, Key Corporate Services has targeted relationships with many top companies in Finance & Accounting. Contact us today to speak with one of our team members.
