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Due Diligence Checklist Advance Preparation Pays Off when Opportunities Arise
January, 2007
By Doug Robbins
Is selling or acquiring a business in your plans for 2007? If your New Year's resolution involves preparing for a sale or acquisition, you need to be ready when opportunity knocks.
Due diligence describes the activity a purchaser implements between the time it negotiates an agreement to purchase a business (Letter of Intent) and the time the transaction is completed. As an example, when a small manufacturing business was sold for $5 million to a large American corporation, the due diligence list was 42 pages and contained 1,243 items that needed to be reviewed prior to closing. Daunting, to say the least - particularly when considering that three out of four businesses fail due diligence.
There are 10 areas that most purchasers look at:
1. Financial Statements
Generally, financial statements only summarize the business's activity on a yearly basis and provide a 5-mile-high view of the business. The purchaser then needs to go to ground to learn exactly what is going on within the business. Ensure that statements follow generally accepted accounting principles and are reviewed or audited.
2. The Market
What is the business doing to protect its current market, to expand, or to grow within the market? The purchaser needs to take time to survey the market served by the business to determine the future of the market and the nature of the business it is buying. The more compiled market information that can be readily provided, the better.
3. Sales Activity
The purchaser looks at sales channels to determine if they can be easily incorporated into the company's existing operations. Available sales channels are in many forms such as manufacturers' representatives; distributors and/or wholesalers; commissioned and salaried sales staff, and the list goes on. Does the company take advantage of all available sales/marketing strategies to achieve maximum sales?
4. Distribution
The way a business distributes or delivers its product or services to its customers can vary greatly from business to business. Some ways are more efficient and cost beneficial than others, and the purchaser will want to have a thorough understanding of how the company carries on this part of its business.
5. Manufacturing/Process
The purchaser will want to know whether the manufacturing and processes are current or obsolete or whether there are technologies about to be unleashed that will result in lower costs, but which will require significant capital expenditure to achieve the efficiencies that the new technologies promise.
6. Environment
If there are environmental issues the banks will be reluctant to provide financing to the purchaser. They are not just looking at existing pollution, but at waste generation by the business. Are wastes properly licensed and being dealt with in the approved manner?
7. Equipment
What is the market value of a company's equipment? What is the life expectancy of the existing equipment? What is the energy consumption of the equipment and is more energy-efficient available? If yes, at what cost and how many years will it take to pay for the capital expenditure of the new equipment?
8. Record Keeping
Does the company have detailed records of operations in such areas as:
* Sales by customer
* Sales by product line
* Gross Margin by product line, by customer
* Inventory turnover by product line, by customer
* Manufacturing costs on a per product basis
9. Legal Documents
Does the company have all of its legal documents readily available and up-to-date, such as:
* Leases
* Employment Contracts
* Customer Contracts
* Supplier Contracts
* Franchise Agreements
* Corporate Minute Books
10. Facilities
Is the property leased at market value? Is the space adequate for the company's needs and can the company grow within the current facilities? Is the building meeting all current building codes? Are there any work orders against the property?
This list covers just a few of the many things that a purchaser looks at when it initiates due diligence. Owners who are always on top of every aspect of operations will be able to respond immediately and effectively to inquiries. By being prepared, the business will operate much more efficiently, have greater profits, be worth more money and should pass due diligence.
Copyright Robbinex Inc. All rights reserved. Doug Robbins, FCBI, CBC, M&AMI, CM&A, is President and Founder of Robbinex Inc. a company specializing in the sale of privately held mid-sized businesses. Doug can be reached at 1-888-robbinex (762-2463) or doug@robbinex.com. |