Thinking of buying another business? What due diligence should you consider?

When in business, it’s not uncommon to be approached by another business with a view to you buying the business or entering a partnership deal. It might be a competitor that approaches you, or it could be a customer or supplier.

Alternatively, you might identify a business that you would like to acquire as part of your own growth plans.

What things should you consider before entering a deal to buy another business? In this article we will look at some of the key considerations.

Financial assessment
What is the financial health of the business you are looking to acquire? To answer this properly means reviewing accounts, cash flow projections, debts, assets, and liabilities.

Doing a detailed review of these will put you in a good position to understand the financial status of the business. You will learn what working capital is needed by the business, how realistic any projected ventures might be when compared with past performance, and whether there are any hidden liabilities. All this will help you determine the true value of the business and any potential risks involved.

Legal compliance
Ensuring that the business you are looking to buy complies with all their legal and regulatory requirements is essential. You do not want to run the risk of a problem relating to non-compliance coming out after you have purchased the business and then being liable for it.

Permits, licences, contracts, intellectual property rights, and any ongoing legal disputes should all be explored.

If you can identify any legal issues upfront, this will help you to mitigate risks and avoid future problems.

Evaluate how the business operates
Assessing the operational aspects of the business helps you to understand its strengths, weaknesses, and operational efficiency. This includes looking at the processes, systems and infrastructure of the business. You should also explore its supply chain and customer base, as well as its human resources.

Evaluating how a business operates beforehand can help you to decide whether it is a good fit for your business or if there will be difficulties integrating the business with your own processes.

Market analysis
Clearly where you are relying on the target business to increase overall business income, then you need to know how this will be accomplished. You will want to analyse what the competition is for the business, what its current market share is and its potential for growth. Being knowledgeable about industry trends is also important in assessing the marketability of the business.

As you understand the market dynamics of the business you are looking to buy, you will be in a stronger position to assess future opportunities and put together appropriately targeted strategic plans.

Customer and supplier relationships
Evaluating existing customer and supplier relationships helps you to understand how dependent the business is on them, and to know whether there are any potential risks. For instance, reliance on a single customer or supplier may be undesirable.

This kind of evaluation can also help you to work out what customer satisfaction levels and the business’ brand reputation is like.

Employee assessment
It is vital to review employee contracts, benefits, turnover rates, and the culture of the organisation. This can help you assess whether there are any potential HR challenges you need to be aware of. You can also get a sense of how the employees in the new business will be able to fit and work with your existing team.

Synergy analysis
Evaluating potential synergies between your business and the new business may reveal opportunities for saving costs, enhancing income streams, and efficiency gains. This could mean that the new business will offer you more value than an initial glance might indicate.

In conclusion, there is a lot to consider when looking at buying or entering into partnership with another business. However, thorough due diligence can pay dividends in minimising risks, maximising opportunities, and making sure that the acquisition will bring you success.