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Due Diligence –
Do I need to worry about it if I am not selling my business?
Due diligence is generally considered an activity that takes place as part of
the selling process. It might be wise for you as a business owner to take a look
at the business from a buyer’s perspective in performing due diligence as part
of an annual review of your business. Performing a “Self” due diligence
does two things: (1) It provides a valuable assessment of the business by
company management, and (2) It offers the company an accurate profile of itself,
just in case the decision is made to sell, or an acceptable acquirer suddenly
appears at the door.
This process, when performed by a
serious acquirer, is generally broken down into six basic areas:
• Financial
due diligence
• Legal
due diligence
• Management/Employee
due diligence
• Marketing
due diligence
• Environmenmtal
due diligence
• Operational
due diligence
Financial Issues
Two important questions have
to be answered before getting down to the basics of the financials: (1) Do the
numbers really work? Is this business viable? and (2) Do the financial
statements support this? Once these questions are answered, you should
carefully review:
• Accounts receivable (what does the aging look like, and how collectible are
the accounts in reality?)
• Accounts payable (who are your major suppliers?
do you have supplier agreements in place?)
• Inventory (does it consist of
new parts, or does it include used parts? Is there real value there, or
should the inventory be written off?)
• Who prepared the financial
statements? Year end externally prepared financial statements are
considered more reliable than internal financial statements when viewed by a
third party. The accountant will provide some valuable advice on your
financial statement preparation.
Legal Issues
Are contracts and agreements current?
This is extremely important with recurring revenue contracts like
monitoring. Not only does it represent a contract for your services
itemizing billing and term (automatically renewable are best), but it also
limits your liability. All lease contracts (office equipment,
vehicles, facilities) should be readily available. Are products
patented if necessary? How about copyrights and trademarks? What
is the current status of any litigation? Are there any possible law
suits on the horizon? What would an astute attorney representing a buyer
want to see, and would it be acceptable?
Management/Employee Issues
How integral is the company owner to
the future of the business—would the customers/employees leave if the owner
left? What employment agreements are in force? Does it cover the
key employees at a minimum? What family members are on the payroll? In other
words, who does what, why, and how much are they paid? Also, if
subcontractors are used, are they really subcontractors or they effectively
employees of the company?
Marketing Issues
It has been said that many company officers/CEOs have never taken a
look at the broad picture of their industry; in other words, they know their
customers, but not their industry. For example, here are just a few
questions concerning the market that due diligence will help answer:
• What
is the size of the market?
• Who
are the industry leaders?
• Does
the service or product have a life cycle?
• Who
are the customers/clients, and what is the relationship?
• What
is the risk and potential of your market?
Environmental Issues
Not too long ago this area would have been
a non-issue. That is no longer the case. Current governmental
guidelines can levy responsibility regarding environmental issues that
existed prior to the current occupancy or ownership of the real estate.
Possible acquirers – and lenders – are really knowledgeable, and for the
most part, “gun-shy” about these types of problems.
Operational Issues
The company should have a clear program
covering how their service is handled from initial customer contact through
delivery of the services. Is there a complete listing of all monitored
accounts, including billing and service site information? Do you estimate
jobs and compare the estimate to the actual when it is done?
Do you give your company a "physical" now and
then., or do you wait until someone else does it for you - with a lot riding
on the line? It pays to know how your company truly stands.
Regelle Partners is a business brokerage/mergers and acquisition firm
with a niche focus in the Canadian security industry. Regelle helps
business owners sell their companies by initiating and managing the business
sale transactions.
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