Buying a business due diligence
Buying a business due diligence
When you plan to buy a business, it is important you understand as much as possible about the company you acquire. Hence, it is very important you perform a detailed due diligence process where you find out about the various areas in the company and the possible risks that exist. When buying a business, the buyer is responsible for doing a detailed investigation of the company. The due diligence process is meant to serve this purpose.
The value of due diligence when buying a business
Once you have found a target company to buy and you are getting closer to legally completing the acquisition you will have the due diligence phase to check items. The due diligence phase can help to confirm the seller has the legal rights to key assets and identify potential liabilities and risks. The value of due diligence is also to help identify any obstacles to completing the transaction (third party consents, regulatory approvals, etc.) and identify steps necessary to integrate the business into the buyer’s operations. Finally, when a company buys a firm it will want to confirm that the acquisition will meet the buyer’s investment objectives. Hence, due diligence in the buying process should confirm the valuation that has been determined in an earlier phase.
Due diligence is a small part of the process of buying a business. Visit the process of buying a company for an overview of all the steps included in a business purchase.
How to determine the scope of the due diligence process?
If you plan on buying a business, you have to determine the scope of the due diligence process. This is an important decision that can have a great deal of consequences. You have to find a balance between the added value and the costs of each part of the due diligence process.
Here is a list of possible items that can affect the appropriate scope of the due diligence process:
- Deal structure (asset deal versus a share purchase)
- Size of the transaction, what is really material to the deal
- Industry of the target business (how well do you know the industry)
- Location of the operations
- Costs and budget you want to make available when buying a company
- Time constraints (has the seller given a deadline?)
- Identity of the target (do you know the company well?)
- Competition (are there any other possible buyers involved?)
- Do you need due diligence reports to achieve financing to buy the company?
Due diligence questions when buying a business
It is important to ask the right questions when doing due diligence. Due diligence is an important aspect of any M&A process. Each business you buy will be unique and can have different issues. Hence, your questions need to be specific to the business you buy.
Questions you should ask during due diligence when buying a business
- How much of the client relations depend on the owner?
- How high is the customer concentration or spread?
- What is the reputation of the organization?
- What are items the current owner considers risky?
- What are possible future threats to the business?
- Who are the key employees and how can the buyer ensure that they will stay with the business?
- What is the company culture and how should that be preserved?
- Numerous other questions
Due diligence when buying a business
When you buy a business, it is important to conduct due diligence in many areas, so you will not be surprised in the future after you have bought the company. The preference would be to hire specialists in the various areas to help you in the investigation phase when buying a business. There are a lot of firms that provide due diligence services that can help in the process of understanding the business you buy.
Due diligence items in purchasing a business that can be investigated:
- Reputation of the organization
- Physical assets
- Real estate
- Intellectual property
- Licenses, permits, environmental issues
- Products and customers
- …and much more
If you want to have a brainstorming session with us about your due diligence process, please get in touch.
Due diligence checklists to use before buying a business
If you buy a smaller company and have limited support of external resources in the due diligence process it is wise to use due diligence checklists to ensure you make the right decision concerning the company you plan to buy.
We have various types of due diligence checklists you can use. Below are the available downloads;
For more information about due diligence, we suggest contacting us.
Due diligence support for your business purchase
If you want to buy a company, it is important to organize a thorough due diligence process to ensure you find the critical items. Corporate Finance in Europe can help you in the due diligence process. We have people that are active full-time in providing due diligence that help buyers in this process. Our people are independent and give an objective opinion in their due diligence reports. Please contact us if you need support in the due diligence process.
Due diligence should confirm the business valuation. If no proper valuation has taken place, then due diligence is wasted money. We suggest visiting business valuations for details about a proper valuation.