Due Diligence Checklist for Buying a Business
Why you choose to purchase a business will differ depending on your situation. Maybe you want to take a competitor off the board by acquiring it. Maybe you want to expand your current operations. Or maybe you just want to take the entrepreneurial plunge.
But one thing that remains constant no matter your reason: Buying a business is a major investment.
It’s also not a guarantee of success. Far from it. Buyer’s remorse is more than common in the world of mergers and acquisitions (M&A).
But you can at least improve your chances of making a worthwhile transaction by conducting thorough due diligence – an investigative process that assesses the financial, legal and operational health of the business.
Here’s a comprehensive checklist to help mitigate risks and make an informed decision.
1. Financial Due Diligence
A business’ financial health the foundation of your investment, so you’ll want to assess the following areas:
Financial Statements and Records
- Review at least three years of financial statements, including income statements, balance sheets and cash flow statements.
- Assess tax returns for the last three to five years. This will help you understand whether the company has been tax-compliant, and help you spot any accounting inconsistencies.
- Examine bank statements to identify any discrepancies between reported earnings and actual cash flow.
Revenue and Profitability Trends
- Analyze sales reports to understand revenue trends and seasonality.
- Identify the business’s profit margins and compare them to industry standards.
- Check for financial risks, such as revenue concentration risk. (In other words: Does the company rely too heavily on a small number of customers?)
Debt and Liabilities
- Review all outstanding debts, including loans, leases and credit agreements.
- Check for unrecorded liabilities, such as unpaid employee benefits or supplier obligations.
2. Legal Due Diligence
You’ll also want to make sure that, soon after making your purchase, you won’t slip into legal pitfalls you could’ve identified ahead of time. Review the following:
Business Structure and Ownership
- Confirm the business’s legal structure (LLC, corporation, sole proprietorship, etc.).
- Review ownership records and ensure the seller has the authority to transfer ownership.
- Examine any shareholder agreements or partnership contracts.
Contracts and Agreements
- Assess all current contracts with suppliers, customers and employees.
- Review lease agreements for real estate and equipment to understand ongoing obligations.
- Identify noncompete agreements and exclusivity clauses that might affect future operations.
Regulatory and Compliance Checks
- Ensure the business complies with local, state and federal regulations.
- Verify necessary business licenses and permits.
- Check for environmental compliance and potential liabilities.
3. Operational Due Diligence
A business is more than its numbers and contracts, of course. The flow of daily operations also determines long-term success.
Human Resources and Employees
- Review organizational structure and key personnel.
- Examine employee contracts, compensation structures and benefits.
- Assess employee turnover rates and workplace culture.
- Determine whether there are any ongoing labor disputes or lawsuits.
Customer and Supplier Relationships
- Analyze the business’s customer base: Who are the biggest clients, and what is the retention rate?
- Assess supplier agreements to determine reliability and costs.
- Identify potential risks from vendor dependency or supply chain disruptions.
Technology and Intellectual Property
- Review software, patents, trademarks and copyrights owned by the business.
- Ensure IT infrastructure is secure and up to date.
- Identify proprietary technology or trade secrets that add value.
4. Market and Competitive Analysis
You can know the business head to toe, but if you don’t understand the market landscape, that knowledge won’t do you much good.
Industry Position and Trends
- Research market trends and growth potential for the industry.
- Identify the company’s competitive position within its niche.
- Examine customer feedback and online reputation.
Competitor Analysis
- Identify major competitors and their market share.
- Assess the business’s unique value proposition and differentiators.
- Understand potential threats and opportunities in the market.
Need Help With Your M&A Efforts?
Buying a business is no small endeavor, and it requires a meticulous approach to due diligence. But you can minimize your risks, and maximize the potential for success, by systematically reviewing financials, legal obligations, operations and market.
That’s why, before finalizing any deal, you should consider consulting financial and legal professionals to ensure no detail is overlooked.
McManamon & Co.’s merger and acquisition professionals provide insights to help you identify the best option for your company by assessing the strategic fit of a business and analyzing all aspects of the deal. We look at possible synergies, help with negotiations, prepare financial models and assist in assessing transaction implications.
Are you thinking about buying a business? Call us at 440.892.8900 or contact us online today.
Tags: consulting, McManamon, McManamon & Co., mergers and acquisitions, small business | Posted in McManamon & Co., mergers & acquisitions