The process of buying a business: due diligence
The indicative offer has been placed and the letter of intent has been signed. The next steps are to confirm that, in fact, the business that we want to buy has all the characteristics that we believe it has. Everyone likes surprises, but not in the context of business. Surprises in business, and especially M&A, have the capacity to cost business owners millions of dollars; so to prevent these surprises from arising, thorough due diligence must be conducted.
What is Due Diligence?
Just as the name says, it is a need that must be done by a buyer before paying for a business because once it’s bought, all its advantages and problems are yours. Your objective is to verify that what you are buying is what you are receiving.
Many inexperienced businessmen become very easily attached to the first option that they like, and will look for a shortcut with the due diligence because they want to close the sale as fast as possible. This may happen because they have been searching for a long and are tired of the negotiation; they are ready to be done and they do not want to think of the possibility of having to start over. However, this moment calls for calm and objective actions, conducted through a thorough and rigorous revision.
Other times the seller will hold back from sharing all of the information with the owner, or the owner will be too afraid to ask for it. By not wishing to harm the relationship with the potential seller, you will have left important matters uninspected. The consequences could be detrimental.
You should ask for references about the seller and interview those who know him personally; this includes those that have had conflicts with him. You’ll find out more in these discussions than what the financial statements could ever tell you.
Main aspects that should be analyzed
In due diligence, there are three things that must be analyzed: the business, its finances and the relevant contracts.
Under these 3 areas of analysis, one must make sure to not forget to evaluate the following factors: the company’s history, its operations, products and services, its market and competitive position, its clients and where it stands in relation to them, the quality of both directors and employees, the established compensation system, its competition, its facilities and machinery, the stocks, the financial statements, the production system, its planning and control, its marketing, its system of internal report, its technology, possible environmental problems, its legal stance (all of its contracts, its legal capabilities to sell the business, its property registration), its fiscal approach, labor demographics, social security, future perspectives for your company, its commercial value, insurance, patents, brands, and debt.
You must prioritize the information that is most relevant to you, since the buyer will not gather all the relevant aspects for your due diligence process. You want to start with what’s most important since you will benefit from the seller’s inital energy and enthusiasm. Once you are further into the process and continue to ask for more details, to the speed in which he completes your requests will invariably decelerate.
Due diligence will provide four types of information:
1- Information that will help you decide whether to buy the business or not
2- Your price range
3- Your terms for the sale agreement
4- Opportunities to improve the company.
Buying a business is a long process, accompanied by intense emotions of breakdowns and crisis, in which you start feeling as though the sale agreement will fall through. The advisors that have participated in numerous sales know it’s a matter of tenacity, of patience and of finding creative formulas that will get the process back in motion until the objective is fulfilled. If you are looking for a business to reinforce yours, do not hesitate to contact us!