I recently participated in a Business Acquisitions roundtable discussion. The roundtable was made up of acquisition entrepreneurs well known for their roles in company growth and market consolidation. As a result, these successes have afforded these entrepreneurs to live lives with considerably more independent lifestyles (especially for the more well-capitalized entrepreneurs present – perhaps a topic for another post). One of the topics discussed at the roundtable was from a participant’s question, “What considerations should I have when conducting due diligence during the business acquisitions process?” Often times, failed deals are the result of a lack of conducting thorough due diligence on key information items on the buyer’s part. The questions like those below in the areas of Seller, Market, Financials, Legal, Environment and Personnel are initial considerations that should not be overlooked:
About the Seller
Learning as much as possible about the seller’s motivation for exiting in order to provide important insight into what their exit target is. Questions to ask regarding seller due diligence include:
- How was the business started?
- Why is the business for sale?
- Is the seller selling the entire entity or just the assets?
- Is there a business plan in place?
- What keeps the seller up at night?
- If the seller is involved in the business: How much salary does the seller take (now/after acquisition)? How much vacation (now/after acquisition)?
About the Market
A few questions about market due diligence:
- What is the size of the market and what market share does the acquisition target hold?
- To what level can the acquisition be grown to?
- What are the biggest challenges to growth?
- Who are the industry leaders (local/national/world)? Is the company considered a market leader in any aspect?
- Does the product or service have a life cycle, or seasonality?
- What would the business’ customers and competitors say this business does best?
About the Numbers
More than anything else, it is important to thoroughly understand the financial due diligence of the prospective business acquisition. To determine if the seller’s claims are supported by the figures, ask to review three to five years of history and future projections:
- Gross margin
- Cost of Goods Sold (details)
- Earnings before interest, taxes, depreciation and amortization (“EBITDA”)
- Capital investments
- Accounts receivables
- Accounts payable
About Legal Issues
To avoid hidden surprises, it is important to dive into legal due diligence issues in the company, including:
- Any possible future lawsuits (If so, due to what?)
- Is the business location owned or leased (If leased, what are the terms?)
- Is there proof all taxes have been paid?
About the Environment
Conducting environmental due diligence is a crucial initial step. Governmental guidelines can levy responsibility for environmental issues that existed prior to the current ownership. Find out about any hazardous materials/waste disposal or other environmental considerations that must be taken into consideration.
About the People
If purchasing more than just the physical assets of a company, a potential buyer should understand key personnel issues such as:
- Who else (besides the seller) has equity ownership in the organization?
- What employment agreements are in force (FTE/Contract)?
- What role do other family members play in the business?
- Who are the key people, what do they do and why?
- Which key employees are most likely to leave if there is a sale, and why?
- How well documented are the business processes?
Business acquisitions are a better way for entrepreneurs to go into business versus startups. However, with that said the business acquisitions market still is littered with deal casualties (Even with showing considerable upside versus startup entrepreneurship). Taking the time to conduct the proper due diligence is the key. Due diligence in the areas of Seller, Market, Financials, Legal, Environment and Personnel are initial considerations that should not be overlooked.
PS – My firm is actively pursuing business acquisitions of small businesses ($1-$10Million Annual Revenue). If this describes you/your business and you’d like to inquire about our business acquisitions process, email email@example.com.