When you’re looking for a business to buy, it’s important not to lose sight of what matters most. Don’t let excitement cloud judgement. Conducting the correct due diligence when buying a business helps you understand if the opportunity is really as good as it looks on the surface.
Here are the steps we always recommend you go through when you’re considering a business to purchase. Make sure that you’re getting the right deal for you, that all parties benefit, and that the deal gets over the line.
Here’s what you should be scrutinising before concluding any deal.
Of course, you need to check the numbers. Get to grips with financial statements, tax returns, and analyse the company’s cash flow. It can be useful to look at the past three to five years to spot trends too.
Are revenues consistently growing? Has there been any unexplained dip in profits? Also, what’s the debt situation? A balance sheet overloaded with liabilities could be an issue.
Thoroughly analyse the assets. Look at physical assets like property, machinery, and inventory, as well as intangible assets like intellectual property and brand reputation. Make sure they are valued accurately and that ownership is clear.
It makes sense to get your accountant involved too at this point. Let them work through all the documentation to create a clear picture for you. The numbers only tell you historical information of course, but they can help you to create a new strategy for ongoing growth and also help you uncover any red flags that you need to be aware of pre-purchase. Not to mention they will likely be the main factor when it comes to purchase price.
Legal due diligence is incredibly important. Check for any ongoing or potential litigation. Are there any disputes with suppliers, customers, or former/current employees?
Are all licences, permits, certifications etc. up to date and are all the necessary ones obtained? Make sure you can access all the relevant documentation.
Perhaps most importantly, scrutinise the contracts with key suppliers and clients, and the employment contracts to make sure the business has adequate protection.
Understanding the day-to-day operations can reveal a lot about the intangible value of a business. Try to evaluate the efficiency of current processes, understand how the key people operate and the dynamics of the team, seek to establish if the supply chain is robust, and identify any recurring issues.
Look to assess the quality of the products or services. Analyse customer feedback and reviews. This could include spending some time in the business to watch it in action too if that’s a possibility.
People are the biggest factor to any business’ success. This however can be the most complex aspect to evaluate without being involved in the business, but you should be able to review the structure of the organisation and personnel trends.
High turnover rates can be a sign of deeper issues. Try and understand if the company culture is right or whether the working environment will need an overhaul – and what the costs and the time implications would be.
Consider whether the current team will stay on post completion and whether they have the skills to help grow the business. Sometimes, key staff members leaving can impact the business more than any other discrepancies.
Evaluate the quality of the relationships on both sides. Are vital customers on stable contracts so that you can count on that revenue continuing when the current ownership departs? Are important suppliers reliable and happy to continue the relationship post completion?
Understanding this could make the difference between success and failure.
As always with something as important as due diligence when buying a business, consult experts every step of the way. Your accountant, the relevant legal professionals, and a reliable business broker – which is how we can help.
Business Partnership is a network of business brokers covering the UK. Find your local expert here. We will provide a free valuation of your business and can work with you through every step of the sale process – including being able to recommend legal professionals from our contacts.
There’s never any obligation and discussions are always confidential. Get in touch with us today to find out more.
Whether you’re selling, buying, or planning for the future, Business Partnership is here to help. Contact us today to speak with your local Regional Partner and start your journey toward success.
Whether you’re selling, buying, or planning for the future, Business Partnership is here to help. Contact us today to speak with your local Regional Partner and start your journey toward success.