Acquisition Due Diligence - 3 Key Areas to Investigate

Posted by Dave Richards, Managing Partner on Sep 19, 2017 8:00:00 AM
Dave Richards, Managing Partner
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Due diligence is a vital step in the process of acquiring a business. As a buyer, you’ll want to ensure that you know exactly what you’re purchasing prior to agreeing to the transaction—this not only includes assets and future sales forecasts, but also liabilities, contracts, employee agreements, litigation risks, intellectual property, and much more.

By doing your homework in advance, you’ll not only be prepared to deal with any potential issues, you will also have a better sense of the value of the company you’re hoping to purchase. Your due diligence will vary depending on the type of company you’re purchasing, and the type of industry you’re in, but in general, here are some of the key areas you’ll want to investigate:

1. Strategy

It’s important to have a good understanding of the target company’s past and present, as well as its plans for the future. You’ll also want to find out whether the company will be a strategic fit within your organization. Strategic items to investigate include:

- Strategic business plans
- Market overview
- Unique selling proposition
- Competitive analysis
- Key clients
- Key employees
- Key shareholders (if applicable)
- Organizational structure
- Marketing and business development strategy
- Company culture, mission, vision, and values

2. Finances.

Knowing the financial situation of the target company is imperative when determining its value and potential future performance. Financial items to investigate include:

- Annual financial statements for the last 5 years
- Cash flow analysis
- Recurring revenue
- Operational and non-operational expenses
- Fixed assets
- Tax history
- Audit history (if applicable)
- Margin growth (or deterioration)
- Current year’s budget vs. actual
- One-time costs
- Future projections
- Working capital
- Public filings (if applicable)
- Disclosures
- Management letters
- EBIDTA and Adjusted EBITDA

3. Operations

As a buyer, you’ll want to understand how the company runs on a day to day basis, and what systems, contracts, and policies are in place to keep the business running smoothly. Operational items to investigate include:

- Patents, trademarks and licenses
- Contracts
- Real estate holdings
- Leases (if applicable)
- Inventory (if applicable)
- Utilization rate
- Technology systems in place
- Disaster recovery plan
- Insurance policies
- Employee contracts, benefits and pay structure
- Shareholder agreements (if applicable)
- Legal issues or lawsuits
- Government, regulatory and environmental compliance

This list is not all inclusive, but it should give you an idea of the types of information you should gather during the due diligence phase of your acquisition. To learn more about the process of selling or purchasing a business, read my recent blog post, 6 Stages of Selling Your Business. If you have any questions about acquisition due diligence, structuring the transaction, or any part of the process of selling or acquiring a business, please leave a comment below, or feel free to contact me directly. I’m happy to help you put together a plan specific to your needs.

Topics: Business Advisory, Transaction Advisory, Acquisition