Due diligence is the term given to the process whereby the potential buyer of a business investigates the company’s performance and valuation.
It is a crucial process, and one that every entrepreneur should get assistance with. Here are the key things that a buyer must evaluate as part of the due diligence process:
- Financial records. The most important thing to examine is the finances of the business, preferably going back over a few years. Tax returns, cashflow forecasts, asset valuations and financial projections are all important to examine.
- Employee records. Particularly important where key staff from the acquired company intend to stay on.
- Intellectual property documentation. Where the business you intend to acquire holds licences, patents or copyrights, ensure these are current and complete.
- Asset registers. Ensure you have a good knowledge of the assets you are acquiring, and particularly check plant and equipment that may need to be replaced or updated.
- Customers. An important factor to investigate is the customer base of your acquisition target. While you may not be able to see the customer database, talking to existing customers to get an idea of the target’s position in the market is essential.
- Suppliers. Depending on the industry, maintaining supply chains after an acquisition is complete may be crucial, so some investigation of the supply chain is important.
- Other issues. Other issues to be aware of may include potential legal issues, regulatory problems and demographic changes that may impact the value of the business in the future.