November 28

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Buying a Small Business – Due Diligence Checklist

By Patrick Millerd

November 28, 2019

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When buying a small business the Due Diligence exercise is a critical final step. As you do it you must engage both your head and your gut to make sure you get the deal you want. To be right the deal must look right and feel right.

Mess it up and it can have expensive and unpleasant consequences. Use a checklist to get it right and you are on your way to a successful small business adventure.

Financial Due Diligence

  • DuePast annual and quarterly financial information, including:
  • Income statements
  • Balance sheets
  • Cash flow statements
  • VAT and tax returns
  • Sales and Gross Profits by product/product group.
  • Rates of return by product.
  • Age analysis accounts receivable.
  • Age analysis accounts payable.
  • Inventory summary.
  • Inventory on hand
  • Inventory valuation
  • Fixed assets – details and valuation
  • Land and Buildings.
  • Equipment and furniture.
  • Land or buildings.
  • Motor vehicles
  • Plant and machinery
  • Review past projections and actual results.
  • Future projections, including:
  • Quarterly and annual projections
  • Projections by product
  • Projection assumptions.
  • History of pricing policies and past increases.
  • Outstanding debts and their terms.
  • Summary of investors.
  • Summary of shareholders.

Legal and Contracts

  • Leases.
  • Purchase agreements.
  • Distribution agreements.
  • Sales contracts.
  • Employee and contractor agreements.
  • Trademarks, copyrights, trade secrets, and patents.
  • Articles of incorporation
  • Business registration documents.
  • Insurance
  • What insurance policy is in place for assets and how much does it cost?
  • What public liability insurance is in place and how much does it cost?
  • What staff insurance do you have in place and how much does it cost?
  • Outstanding loans, liens or lawsuits.

Operational Due Diligence

  • Identify customer patterns.
  • First-time buyers compared to repeat customers.
  • Peak purchasing times.
  • Popular items or services.
  • Popular price points.
  • Marketing.
  • Past and current marketing tactics.
  • Sales and discounts, promotional activity.
  • Marketing and the ROI.
  • Results of past marketing efforts.
  • Market analysis.
  • Demographics and the business’s target customers.
  • Geographic economic outlook.
  • How do people perceive the business?
  • Customers and potential customers, suppliers, and lenders.
  • Research industry trends.
  • Business industry growing or slowing?
  • Profit margins for the industry?
  • Business competitors.
  • Competitor’s strengths and weaknesses.
  • Competitor’s products, costs, and earnings comparison.
  • Threats competitors pose to the business.
  • Market share each competitor holds.
  • Brand recognition? Online reputation, including online reviews, social media reviews.
  • Major contractual commitments?
  • Contracts, where appropriate? Including leases for premises, equipment, internet provision and any other major contract.
  • Outstanding commitments to the other parties in terms of these contracts? 

Product 

  • List of all provided products.
  • Product development cost.
  • Product profitability.
  • Past and projected growth rates.
  • Product development and what future development potential.

People

  • Organizational chart.
  • Current employees, including their positions, earnings, skills, and qualifications.
  • Employee wages compared to wages of people in similar positions in the industry and region.
  • Benefit plans.
  • Leave/time off policies.
  • Projected staffing needs.
  • Union recognition agreements
  • Unionised employees 
  • Union relationship
  • Key employee details.

Patrick Millerd

About the author

I support small and medium-sized business owners to drive profitability and cash flow by managing the financial health of their business through understanding the numbers.
Helping business owners build a business management system that puts them in control.

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