What due diligence should you do when acquiring a business?

As a business professional, you know how crucial it is to conduct thorough due diligence. When acquiring another business to grow your portfolio, the process is just as critical as when you’re making any major investment. 

But what should you be looking for? 

Here are the key areas to focus on when acquiring a business: 

 

  1. Financial analysis

The first step is to perform a detailed financial review. Examine the company’s financial statements for the past three to five years, including balance sheets, income statements and cash flow statements. 

Look for any inconsistencies, trends or red flags that could indicate financial problems. Pay attention to the business’s accounts receivable and payable to analyse cash flow. 

Evaluate the company’s debt levels, interest payments and debt-to-income ratio. If this is very high, there may be added financial risk that limits future growth opportunities. 

Also, check the business’s tax records to ensure there are no outstanding liabilities with the Australian Taxation Office. 

 

  1. Legal review

As with any acquisition, legalities can complicate matters. Identify potential legal snags early in the process to avoid headaches down the road. 

First, look at the business’s existing contracts with clients, vendors and employees. Make sure these contracts can be transferred to you easily and that they have favourable terms that suit your goals for the business. 

Check for any ongoing litigation or legal disputes, as these could create financial and managerial issues later on. 

Finally, confirm the business holds all the necessary licences and permits required to operate in your location. These requirements may vary by state and industry, so it’s important to ensure compliance. 

 

  1. Market position analysis

A business’s value often hinges on its market reputation and competitive positioning. You may already be familiar with the company you’re looking to acquire, but it’s important to do thorough research. 

Investigate its brand reputation and market share. If possible, speak with clients or stakeholders to gain insights into their experiences with the company. 

Additionally, if you’re planning to rebrand the business under your current brand, consider the potential impact on its existing customer loyalty. Rebranding can be an opportunity, but it can also disrupt relationships if not handled carefully. 

 

  1. Operational due diligence

A detailed review of the business’s day-to-day operations and management is essential.  

Consider the following areas: 

    • Staff: Assess the experience and retention rates of key employees, including managers and support staff. Will these individuals stay on under new ownership? 
    • Management team: Evaluate the capabilities of the current leadership team. Do they have the necessary skills to drive the business forward, or will you need to make leadership changes? 
    • Systems: Examine the systems the business uses for customer management, financial tracking, and operations. Are they scalable and up-to-date, or will you need to invest in upgrading them? 
    • Efficiency: Look at the business’s overall operational efficiency. Identify areas where processes can be streamlined and improved to boost productivity. 

 

Acquiring a new business 

Before acquiring a new business, it’s essential to consult with professionals like your finance broker, accountant and lawyer. Their expertise can help you navigate the due diligence process and avoid potential pitfalls. 

By conducting a thorough due diligence process, business owners can make informed decisions and minimise the risks associated with an acquisition. 

 

If you’re looking to acquire another business, Finance Advisory Co can help you secure the right finance. We can also conduct a health check on your finances to review your existing debt.

 

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