Empower Your Business

Accounting is Just the Beginning

By

Buying a Business

Consentrating

Over the last six months there has been a marked increase in the number of business sale transactions taking place, as the overall business landscape and confidence continues to improve.

The problem is that for the buyer, buying a business is a very risky thing to do and before signing a Sale and Purchase Agreement the buyer needs to do due diligence, irrespective of the size or complexity of the business involved.

So what is due diligence and what’s involved?

Essentially due diligence is about doing your homework – opening the hood and having a thorough look at all aspects of a business. Due diligence assesses key risks and confirms your understanding of a target business is correct. Investigating and evaluating a business is a critical process in any business purchase. It should be a non-negotiable item on your purchase checklist.

A due diligence process typically involves three parts:

1. Financial

2. Legal

3. Commercial

Factoring in your investment for due diligence is essential – you need to consider the cost to you in both time and money if you get the purchase wrong.

The scope of the work undertaken will depend on various factors including size of the transaction, complexity, overall investment, the purchasers experience in the industry and whether you need external expertise. The scope of the assignment and what work is being undertaken by which advisor is important to understand. Make sure thorough checklists are used to ensure all critical areas are addressed.

Some important aspects to consider:

  • Confidentiality – an important consideration for both parties to ensure this is preserved throughout the process.
  • Level of information available – how much information is available and how much is enough to ask for so that the vendor is not put off by the deal.
  • Quality of information available – how accurate is the information? It should be validated to various sources.
  • Time frame to complete your due diligence
  • What are your motivations for acquiring the business? Are you looking for access to new markets, new technology and products, new customers?
  • Requirement for financial modelling – how will the new business be structured? How much debt will it have? What are the cash requirements of your new business?
  • Who are the key people in the business? Who is critical to the business in terms of relationships and profitability?
  • What are the key risks of the business – legal, financial, commercial – including having a thorough understanding of the marketplace the business operates in.
  • Understand how the business makes its profit. From which customers? Using which staff? At what time during the year?
  • What hours does the current owner work? Are they excessive and if so, are you willing to do the same?
  • What are the key trends of the business? Where is the business in its life cycle?
  • Are you looking to merge the acquired business into an existing business? If so what are the steps involved? What value will be created if you do?

A thorough due diligence process, undertaken by experienced advisors, gives you the information you need to make an informed new business purchase decision. While undertaking a due diligence process will not guarantee a successful business transaction every time, it does remove the emotion from the equation which can only improve your odds.

If you would like a copy of our excellent Buying a Business Checklist email me on nick@abac.co.nz.