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Mergers & Acquisitions

Due Diligence Checklist for M&A Before Buying a Business

Due diligence is one of the final phases of buying a business. At this point, you have already met with the owners, reviewed the company’s financial position and, finding the opportunity to be ideal, made an offer.

However, did you know that the final deal is still subject to certain contingencies before it is closed? This is where due diligence comes in.

Due Diligence Explained

Due diligence can be defined as the process of verifying the information provided by the seller. The goal is to make sure that the information is true, accurate, and updated. Due diligence is usually an important condition in the buyer’s offer in almost all sales. If any problems are discovered during the process, they may be addressed before finalizing the deal.

It is important to mention that while due diligence is one of the very last steps of the buying process, the buyer should prepare for it beforehand to avoid the risk of mismanagement as a result of important overlooked information.

A Due Diligence Checklist for M&A Buyers

Due diligence considers different aspects of the business, including financial and legal issues, employee relations, operation and processes, products, services, assets, and customer data. Following is a complete due diligence checklist. Review and verify the following components of the business as part of due diligence before you seal the deal.

1. Financial Information

Financial and tax due diligence is an important part of the acquisition process. Financial information provides an understanding regarding the financial position and performance of the business. You should verify audited financial statements of at least the past three years.

Keep in mind that many businesses create financial statements with the goal to minimize taxes. Therefore, make sure you ask the business owners or accountants to explain it in detail, including the business cash flow and owner’s benefits.

Verify all numbers, especially those related to working capital and financials, such as balance sheets, accounts payable and receivable, and income statements. Also, ask for credit reports, tax returns, debts and terms, analysis of gross profit margin and expenses, and inventory.

2. Legal Issues

Check the company license and permits to make sure everything is in place. Also, inquire regarding any outstanding legal issues or ongoing litigation. Finally, make sure the business is insured under the right insurance policies.

3. Business Structure & Operations

Before you buy a business, it is important to gain clarity on how the business works and how it generates revenue.

Take a closer look at business structure and operations for this purpose. It includes all information about market penetration trends, market share of the business, competitors, and any other information that may help generate revenue.

This is also your chance to verify the customer base, products or services, labor, materials, overhead and operational costs, and most importantly, the overall business model.

4. Material Contracts

Carefully confirm all legal contracts. You may discover that the company has lines of credit, existing loan agreements, equipment leases, or other financial obligations. Also, make sure to inquire about partnerships with other companies.

Go through every binding document carefully to understand what obligations are in place and how you will be expected to comply with them.

Here are some elements to consider: Business guarantees, nondisclosure agreements, company warranties, purchase or sale orders, mortgage, security agreements, distribution agreements, collateral pledges, loans, and stock purchase agreements.

5. Employee Information

As the next business owner, you need to be aware of who your employees are and their contribution to the business. Ask for the organizational chart and employee roster. Review employment contracts and any independent contractor agreements. Check all payroll information, HR policies, retirement plan information, employee tax forms, and insurance.

It will help you understand who your key employees are and if you need to offer them incentives in order to ensure they remain part of your team.

6. Customer Information

Understanding your customers is an important part of running a successful business. The process begins before you finalize the deal on the business.

Review customer information, customer databases, sales records, and subscriber lists to identify the target audience, how customers are converted and retained, and what they purchase from the business.

Since customer acquisition is closely linked to marketing and advertisement, make sure you learn about all marketing and advertising programs. Also, ask for copies of all correspondence and standard communications with customers.

7. Assets & Real Estate

Get a full inventory of the business to identify all physical assets, real estate assets, and their current market value. Physical assets include vehicles, inventory, equipment, furniture, supplies, and fixtures. Real estate assets include office buildings, leases and titles, warehouses, and other real estate property under the business name.

8. Intellectual Property

Intellectual property is the final component of the due diligence checklist for M&A buying a business. It includes all copyrights, trademarks, patents, formulas, digital information, and other exclusive intellectual property owned by the business.

Windes Provides Professional Due Diligence Services

Due diligence covers a wide range of business elements and can be complex and time-consuming. Since there is no room for error, it is advisable to hire professionals specializing in due diligence to ensure effective and reliable results.

As a leading accounting firm, the professionals at Windes are equipped with the knowledge and experience required to check every item on the due diligence checklist and ensure you invest in the right business. Connect with Windes for more information.

Need Assistance with Due Diligence?

Working out the details of a M&A transaction can be complicated. Contact Jim Cordova to explore your options.

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