Thinking of acquiring a business? Whether it’s a stock transaction, asset transaction or a merger, acquiring a business may be a great idea if you only do your homework. When you invest or merge with another business, you can benefit from the already established brand, trade secrets and experienced staff.
While acquiring another business has many benefits, you may also face some risks. For this reason, it’s important that you do your due diligence before you start negotiations with the other business. Traditionally, you should do three types of due diligence before merging or acquiring a business. These include:
Financial due diligence
Studying the company’s financial records is the first important step in due diligence. As you and your accountant review the financial statements, be on the lookout for the following:
- Tax liabilities
- High employee turnover
- Owner compensation
- Sluggish inventory turnover
- Poor profit margins
It’s also important that you confirm that the numbers add up. For instance, the tax returns information from the business owner should match the information in the financial statements.
Commercial due diligence
When doing commercial due diligence, your aim should be to understand how the business makes its money, its goals, and its competitive environment. Other things that you should check include the following:
- The market landscape
- Regulatory environment
- Significant risks
- Customer concentration
- Business model risks
While some vendors may hesitate to let you meet their employees, customers and suppliers, it’s vital that you push for the meetings, especially if you have some concerns about risks in any of the areas.
Legal due diligence
When it comes to making the sales and purchase contract, you may want to check whether the business has a legal title to sell, any litigation issues and the ownership of all assets in the business. Remember also to review all other legal matters that could affect the business down the road. These may include:
- Leases
- Licenses
- Permits
- Contracts
- Corporate documents
Due diligence when acquiring a new business involves more than just finances. You also need to gather and review all necessary information to help you know what you’re getting into, what needs fixing and if you’re the right person for the business. However, all this work may be too much for just one executive. Therefore, consider getting legal help so that you can focus on your daily business operations.
