A Guide to Buying a Company: Due Diligence
18 May 2017
Buying a business can be a very daunting feat that requires a huge level of consideration and careful planning. One of the most important steps in the buying process is Buying a Company Due Diligence.
Buying a Company Due Diligence is essentially a background check into the business and involves gathering as much information as you can in order to make a well-informed decision about whether or not to purchase the company.
The main aim of Buying a Company Due Diligence is to check that the business you want to purchase is financially and legally sound, to ensure you don’t encounter any nasty surprises further down the line!
Buying a Company Due Diligence Process
- The first step in the Buying a Company Due Diligence process is to ensure that you have the right team around you in order to complete the process thoroughly. You will likely need assistance from your accountant, solicitors and your bank manager. Alternatively, you can outsource your due diligence to a third-party to complete on your behalf.
- If you are employing a third-party to conduct the due diligence for you, the next step is to set out clear guidelines stating a time-frame and checklist of items you want to be included.
- You will then need to contact the target company to request a range of documentation, including financial statements, legal records, insurance policies, lists of shareholders and employees and information on the company’s clients.
- Once all the key documentation has been collected and thoroughly examined, you can then utilise this information to calculate profit projections and assess the overall risk involved in buying the company.
- If, after considering all aspects of the due diligence research, you decide that you would like to proceed in the acquisition of the company, you must then decide on an initial offer. At this point you should also make a decision on the maximum price you’d be willing to pay, as it’s unlikely that your first offer will be accepted. Once you’re happy with your offer, send a formal letter to the company to submit your offer.
- Following this, a period of exclusivity and an indemnity agreement must be agreed, and then you’re almost there!
- Finally, if your offer is accepted, you must agree on a payment method and a completion date with the target company, and then it’s all yours!
What are the benefits of conducting Buying a Company Due Diligence?
One of the key benefits of Buying a Company Due Diligence is that it provides you will all the important information you need to make a well-informed and confident decision about whether to buy the business.
The due diligence process allows you to delve into the company’s accounts, cash flow and tax returns, which enables you to make educated predictions on how the company is likely to perform. Armed with this information, you can assess whether buying the business is a financially savvy move.
Scrutinising the company’s financial credentials will also help you when it comes to deciding what you think the company is worth and how much you are willing to offer. For example, if the company has a large number of outstanding debts, you may be inclined to make a much lower offer.
In order to access the documentation you need, considerable communication will need to take place between you and the target company. Although this may be a long process, it can work to your advantage as it allows you to building a good sense of rapport with the company before the acquisition goes ahead.
What’s more, examining the company’s documentation, ethos and employee agreements will help you to establish a strong sense of what the business is about and develop plans for how you wish to take the company forward.
Buying a Company Due Diligence Checklist
•Financial documentation - including tax returns, cash flow statements, balance sheets and income statements. These documents should be reviewed in detail to assess the level of debt, the company’s profit margin and to get an idea of how the business currently organises its accounts. This information will help you to consider whether buying the business will be a worthy investment.
•Legal documentation - including insurance policies, intellectual property documents, patents and consulting agreements. These should be thoroughly assessed to examine whether the business has any serious legal issues which could present potential risks or additional costs to your acquisition of the business.
•Personnel and salary guidelines - including a full list of employees and their roles, full list of directors and shareholders, employee agreements, salary information and confidentiality documents. These documents will enable you to get a clear understanding of the structure of the company and an insight into its employees.
•List of customers and major clients - this information can be used to consider whether the business is growing, diversifying and whether the company has an adequate infrastructure in place to guarantee future success.
How DueDil can help
From due diligence to deal prospecting, DueDil helps businesses make data-informed decisions.
DueDil combines comprehensive sources of company information and an intuitive set of features that allow any team to uncover opportunities and understand risks. Unlike traditional information suppliers, DueDil provides a unified platform for teams across a business to contextualise and navigate the relationships between sets of data.
DueDil takes live data from a wide range of authoritative sources, combines it and presents it clearly. On top of this foundation is an intuitive set of features that allow users to search for, segment, benchmark, monitor and export company information.
To find out how your business can enhance its due diligence processes, get started with DueDil today.