The importance of due diligence when buying a business

Author: Richard Dilley
Richard Dilley

Buying a business is not a decision that should be taken lightly. Additionally, the importance of conducting thorough due diligence, before any formal agreement is entered into, should not be underestimated.

Whether you are acquiring the shares in a company or the trading operations will determine the approach you take.

With the help of an accountant or adviser, due diligence can uncover risks, anomalies or unforeseen liabilities that could undermine negotiations. If negotiations are undermined, the viability of the purchase could be too.

Due diligence; key considerations

The following should undoubtedly form part of the due diligence process;

General company insight

Before buying any business, you should consider how much you actually know about it. Details about the company’s history, and a clear business plan detailing short-term and long-term objectives, for example, can be invaluable.

Finances

It’s important to have a clear understanding of the target company’s financial profile. This is useful not only to verify their profitability, but to draw comparisons against others operating in the same market.

If you are buying the shares of a business then you buy it ‘warts and all’. Understanding the targets balance sheet, profit and loss statements and other information can help you to do this. Consider off balance sheet debts owed to the business or by the business, factor in forecasts and tax liabilities, and find out where their funds come from and how they utilise them.

You need to understand the targets order book together with ensuring you have the rights to the its ongoing intellectual property.

The market

Evaluating the market that the target business operates in is important can give you an idea of the potential for growth and the competition that you may be up against. Long-term sales figures can indicate the relative stability of the market and help you to identify any noteworthy present or future trends.

Customers

Buying a business means you will likely also inherit a number of significant customers. Consequently, it is wise to review agreements that the business currently has in place with these customers.

Operations

You should have a clear overview of the target business’s operations. ‘Operations’ typically include key processes that are in place, how the management team is structured and other relevant staffing information, details of suppliers and details of assets and equipment.

How can George Hay help?

Acquiring a business is no mean feat and so ensuring that you use the right professional advisers is key.

We have a wealth of experience in assisting with acquisitions and disposals and we work not only with you, but also with your solicitors and bankers to ensure that any deal is completed in a timely, efficient and financially beneficial manner.

To find out more about how we can support you with the purchase of a business, all the while offering objective and professional advice to help you realise your business dreams, contact us today.

www.georgehay.co.uk

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