By
Bob Thilmont and Bert Vermeulen
2003
The process of buying or selling a company requires
a thorough due diligence of all key elements of the
business. The following is a listing of the major
areas typically reviewed. It is intended to be a
checklist for sellers to know what to prepare and a
checklist for buyers to know what to ask for.
1. Sustainability of the Business
In this part of the review, the buyer will want to
understand the potential economic value of the
business he is buying. More specifically:
a. What is the financial Business Plan for the next
3-5 years?
b. What is company's vision?
c. What are the company's core competences?
d. What are the existing strategic alliances?
e. Are there synergies with the acquiring company?
f. What part of the product life cycle is this
business in? Is it on the "bleeding edge?" Can it
be expected to be a "cash cow?"
g. What new products are under development?
h. What new customers are under development?
i. What does the current order status and backlog
look like?
j. How stable is the customer base?
2. Competition
In this part of the review, the buyer will want to
understand the dynamics of the market and the most
significant competitors. If this is a manufacturing
business, the international aspects of production and
competition will also need to be understood.
3. Financials
Typically, audited financial reports will be required
and these will be reviewed by a competent outside
financial auditor. If this is a company operating
outside the US, the local financials will often need to
be converted to USGAAP standards. Among the key
financial data to be reviewed are:
a. Cash Flow
b. Days Sales Outstanding
c. Tax Returns
d. Obsolete inventory
e. Accounts Payable
f. Long term contracts - Payables
g. Long-term liabilities for pensions, etc.
h. Asset Value - book versus replacement
i. Accounting procedures and policies.
j. Facility ownership structure and any leases related
to facilities or equipment.
4. Organization Infrastructure
This is a large category of inquiry that should be
made by someone familiar with this type of business.
Among the major areas of interest are:
a. Management Team. Are they capable or
running and growing the business? Will they be
staying on after the acquisition? If they are
leaving, what is the structure of non-compete
agreements?
b. Human resources and personnel policies. What
is the pool of talent versus organizational needs?
Is there an employee handbook? What other
personnel policies exist?
c. Are facilities in good condition, convenient and
customer-friendly?
d. Is there are written quality policy? What quality
certifications are there (ISO 9000, etc)?
5. Potential Liabilities
It is important to understand the risk of any major
financial "surprises" in the future. Often this also
requires representation letters from lawyers or
environmental study firms. Topics include:
a. Warranty issues
b. Environmental (Superfund)
c. Patent infringements
d. Liens/ Lawsuits
e. Pending regulatory issues
f. Unfair dismissals
6. Technology
If this is product company, it is important to
understand any patents that have been awarded or
applied for. Is there any other know-how or research
and development that could provide competitive
advantage?
7. Sales & Marketing
Since the acquiring company is typically interested in
growing the business, it is important to understand
current activities and results. Among the areas of
importance are:
a. Market potential. For more information of some
ways to do this, see the Market Size Assessment
brief on the www.corp21.com website.
b. Distribution channels. How is the product sold?
How good and loyal is the sales force?
c. Promotion. How is the product promoted?
- Advertising
- Trade shows
- Web site, etc.
8. Business to Business Fit
Sometimes there is additional benefit to a particular
acquisition because there is a good fit between the
acquiring business and the company being purchased.
Among the characteristics that are important to
understand are:
a. Strategy fit. How well does the business
direction for the acquiring company fit that
of the company being purchased? How well
do the products and markets fit together?
b. Personnel fit. How well will the people and
cultures of the two organizations fit
together?
c. Financial fit. If one business is growing but
needs cash, while the other is profitable with
limited prospects, this is a better situation
than if both are cash cows, or both are cash
hungry.
d. Geographic fit. If the merger gives the two
companies a broader geographic reach, this
is good, but it must be balanced against the
costs of trying to coordinate to dispersed
entities.
Information Gathering
In addition to information available from the
company, the following outside resources may be
useful in order to make an assessment:
a. Chambers of Commerce
b. Educational Databases
c. Competition
d. Industry Associations
e. Peers
f. Mentors
g. The internet, see the Industry Structure Analysis
brief on the www.corp21.com website.
Conclusion
I hope that you have found this brief helpful. Please
let me know if you have any questions or suggestions
for areas that should be covered in more depth. The
following are some references if you like to explore
this topic in greater depth:
- Brown, John H. How to Run Your Business So You
Can Leave It In Style. (c) 1997 Business
Enterprise Press.
- Vermeulen, Bert. Market Size Assessment.
(c)2003 Corp21.
- Vermeulen, Bert. Industry Structure Analysis.
(c)2003 Corp21.
- Note, this paper is based on a Due Diligence
Outline originally produced by Bob Thilmont at
Mountain Global. Copies of this original outline
can be obtained by contacting Bob at
www.mountainglobal.biz.
Download Publication (PDF)