Here we want to give an outline of the task that must be done when considering a business purchase. It is impossible for us to foresee everything, but a summary can be useful… the subject is vast it can be covered in books.
Key aspects include legal, accounting, operational, and asset condition due diligence.
Whether in the purchase of assets or shares, the condition of the assets represents the same diligence… If a building is involved, it is necessary to make sure to do a good environmental due diligence as well as at the level of the structure / inventory of inclusions. For equipment, an evaluation or an inspection of the operating condition can be useful. Regarding receivables, inventories, and payables – the due diligence on the quality of assets remains the same depending on what is included in the transaction.
At the operational level, due diligence remains the same whether we buy a business in assets or in shares, whether our intention is to continue operations. At the customer level, it is necessary to see the dependence on one or a few major customers, the trend of purchases, the development of current business, the terms of payment and general satisfaction. Regarding suppliers, the same questions apply, in addition to reliability, possible alternative choices, changes considered by the main ones. Concerning internal organization, processes, suitability, facilities, and equipment, as well as technology are all factors to be understood. The last, but not the least of the operational points remains the human capital – who is the team, what are the skills and the structure, the management practices, the challenges, the turnover of employees.
Buying a business, regardless of the process, is a complex operation with many facets. You will never find a perfect company; however, by fully understanding the issues, you will see if you can add value and if the challenge is right for you.
The most traditional due diligence is carried out by professionals (lawyers and accountants) who cover these aspects, here are some of the points and questions that might be worth answering…
An accountant
- Balance sheet: the quality of the assets needs to be reviewed. Are the receivables good and do the customers acknowledge owing the money. What quality are the inventories – this is probably the most complex point in some cases – are they present, are they up to date, how are they counted, we have them for how long? What is the impact of deferred tax with the assets held?
- Results: recognition of income, has the good been delivered, is it returnable, is it sold or on consignment? Then are the adjustments to EBITDA justified? Do we have all operating expenses?
- At the tax level, we must validate the different levels – and we have: Federal, Provincial, Municipal – Taxes, DAS, GST, QST, Taxes, etc. – this aspect is generally well covered.
Legal
- This job is generally well structured with the review of the minutes book (minutes), the verification of lawsuits and legal impacts, the review of contracts (customers, employees, suppliers, etc.) according to what is required…
- Strategic involvement of lawyers is essential when drafting the share purchase agreement; this can save you a lot of headaches later.
Diligence can be expensive, but easing or cutting corners can cost you even more.
Validate who you are dealing with. We are starting to see more and more banks asking who will be the “deal team” and they do not hesitate to pass judgment at this level or to demand changes along the way – this can become very costly in time and money. Make sure you have professionals who are experienced in buying and selling businesses… we can refer you to them if necessary.