The Role of Due Diligence in Buying a Business
What Is the Due Diligence Process?
Any purchaser of a business is advised to do their due diligence in analyzing that business’s true value. This value is the sum of various intangibles and other components that often are hard to price correctly. While the purchaser has the legal documents and financial statements provided by the company, the due diligence process will help ensure the purchase is ultimately negotiated (or rejected) based on sound, independent analysis.
The internet is a great starting point in conducting due diligence.
Today, a purchaser can do a great deal of their due diligence using the internet. What used to require weeks of perusing publications to understand industry trends, competition, supplier relationships, employee reviews, owner biographies, etc., can be done quickly by internet search.
Due Diligence usually starts following a Letter of Intent being executed.
The LOI is a non-binding document from the potential purchaser of a potential offer and a range of purchase prices. It acts as the starting point of the due diligence that potentially could culminate in a purchase.
The three parts to the due diligence process
There are three components to due diligence; legal, financial and operational.
A review of proper registration by the business for all jurisdictions in which it conducts business is needed. Bylaws and amendments of the company need to be scrutinized. Any outstanding litigation or legal obligations need to be known.
Things like contracts with suppliers, customers, or employees need to be understood.
Regulatory agency relationships and product liabilities are reviewed along with employee benefits packages. Board minutes, patents, and intellectual property rights need to be detailed.
Accountants needs to review three to five years of financial statements. They will focus on such things as schedules of inventory along with payables, receivables, debt, and contingent liabilities. Of course, the company’s general ledger is analyzed along with internal control processes. Strategic plans, internal memos, analyst reports and bank account statements are also reviewed. Leases and large revenue of largest customers are considered.
Due diligence includes looking at the physical attributes of the company. This includes such things as facility locations and the equipment. Who are the suppliers? What are the logistic-related issues of supplies and who are substitute suppliers? What are the contingency plans in the event of emergencies?
Doing the proper due diligence is the only way to correctly arrive at a fair price for a business. Taking the time to assemble an acquisition team to help conduct the due diligence process will pay off in the end.
If you are looking to hire due diligence team members for an acquisition, consider Key Corporate Services. Our Finance and Accounting Executive Recruiter and Search Team understand how vital it is to find the right candidate for jobs in Finance & Accounting and Acquisitions. Give us a call to place the right person on your team.