Business Assessment: Due Diligence Explained

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Business Assessment: Due Diligence Explained

Brad O'Connor

June 16, 2023

Due diligence is a crucial part of buying and selling businesses, but what exactly is involved? In this article we’ll take a deep dive into the process, to help get you started.

First things first, what exactly is due diligence? Simply put, it is a thorough review of a company’s financial records, legal issues and market positioning before the acquisition takes place. The process typically starts once the buyer has found a business that they’re interested in purchasing, but before any definitive purchase agreements are signed. This extensive research process helps to avoid any unpleasant surprises for either party after the deal is complete.

Step 1: Make a plan

Tackling due diligence is a big job, and one you don’t want to start without a plan. The business acquisition process usually starts with a letter of intent, signed by both parties. This letter outlines the framework for completing the deal, and will include provisions for due diligence on behalf of the buyer. The provisions will include a timeline (one to two months is typical in this scenario) as well as a process for the seller to provide access to relevant information. The seller should provide access to records, premises, and in some cases it might be valuable to review key employees as well. Records should include financial statements and tax returns, budgets and financial projections, as well as articles of incorporation, bylaws, and ownership information. Once this framework is in place, it’s time to hire the right people for the job.

Step 2: Hire the right team

Buying a business is a big financial investment, and you want to surround yourself with the best, most qualified people to assist you with the due diligence process. It’s recommended to hire an accountant who specializes in business acquisitions to look over the financial records, and a corporate lawyer to review any legal issues affecting the company. It is also advised to hire a professional business broker to act as a middleman throughout the negotiations and provide guidance every step of the way. You can also look at hiring market experts, IT professionals, or any other qualified professional that specializes in due diligence for business acquisitions.

Step 3: Do your research!

Once you’ve assembled your team of experts, it’s time to start the research process! The specialized accountant that you’ve hired should now go over the financial records you received from the seller. They should review tax returns, financial statements, budget and other documents to make sure the numbers add up, and the company is actually worth the price you’re proposing. The financial review can also uncover other issues, such as tax liabilities or high employee turnover. Following that, your lawyer will review all legal documents, to ensure all licenses and permits are up to date, there are no external liabilities or potential lawsuits, and client/staff contracts are sound. Once the accounting and legal due diligence have been completed, we recommend you fully analyze the market environment of the business. This involves a comprehensive review of any assumptions made behind projections and future risk, which can help if you have doubts about the sustainability of the business model.

Ready to get started? Contact us today, and one of our experienced business brokers will be in touch with you as soon as possible.

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EVALUATION/CONSULTATION

If you are a business owner considering selling a business, and would like to learn more about OConnor Business Brokers and Consultants and the services we offer, please contact us to arrange a confidential business evaluation.

You will meet one of the Directors of OConnor Business Brokers, and your requirements will be discussed. During the meeting you will have the opportunity to find out more about selling a business, and how our business brokers and M&A Advisors can assist you with the business sale process.

Unlike many other approaches, OConnor Business Brokers start without any preconceived ideas about what is right for you and for your business. By understanding the business and your motivation we can help steer you in the right direction. This often challenges conventional thinking and comes as a refreshing change to the norm.

The Directors of OConnor Business Brokers have experience as business brokers, business consultants, M&A advisors, and business owners. We understand the challenges and pressures that face a business at any one point. We therefore use our time together not to try and sell you our services but to help you understand your options and how we can help.

An initial meeting lasts approximately one hour, and can take place virtually or in person at our office.

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