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Your due diligence checklist when assessing a potential acquisition

Most firms who are considering acquiring a related company are in a strong financial position, and performing appropriate due diligence before committing to a buyout will ensure this remains the case.

There is much to assess before making a decision, and we highlight key points on your due diligence checklist below.

Why is the company being sold?

There could be many reasons why, and understanding this precisely will give an insight into the challenges faced once the deal is done. If the sale is to release funds for retirement, you can be relatively confident as long as you’ve assessed all other areas. However, an impending lawsuit or poor supply chain could be other reasons that are being kept quiet. 

The financials

As mentioned above, an understanding of the financial state of the target company is vital, both as it stands now and what it has been in the past. It’s worth looking back on five years of financial statements, which will allow you to estimate revenue trends for the next five years. View a cash flow analysis to judge money coming into the firm, as well as how it’s being spent.

Assets and liabilities 

Taking on a firm doesn’t just mean its customers, but all the assets required to remain operational. The book value of assets doesn’t give a true representation of their value if sold on the open market, which you may wish to do if they’re not considered to be required. Inspect the assets available, including their expected life expectancy, replacement rate and maintenance history, for a more accurate picture of their worth. 

At the same time, review the target’s payment behaviour and accounts payable to see if there are any overdue debts and why they have yet to be paid. Further liabilities to look into include leases on commercial properties, any debt agreements and unrecorded liabilities that only the workforce may know about. By speaking to existing employees, you can also establish whether there are any compliance issues and assess the risk of fraud. 

The marketing approach

Effective marketing can require a significant investment of capital and time, and you should assess the success of these activities for a better knowledge of how much more budget is needed. Complete a comparative analysis of the target firm and competitors to set a benchmark, before looking into the coordination of sales and marketing teams.

The above points should provide you with a worthwhile overview of a target firm’s past and present status, as well as its future viability. There is plenty more to consider however, and mitigating risk should be among your main priorities when looking to secure an organisation.

 

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