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Celebrating the New Year with Diligence

By Doug Robbins |

Is selling or acquiring a business in your plans for 2007? Is your New Year's Resolution to prepare for the sale or acquisition?

Here's why you need to make a resolution now to be ready when opportunity knocks - a small manufacturing business was sold for $5,000,000 to a large American corporation. Their due diligence list was 42 pages long and contained 1,243 items that needed to be reviewed prior to closing. Daunting, to say the least.

So what does "due diligence" really mean? Due diligence describes the activity a Purchaser implements between the time they negotiate an agreement to purchase a business (Letter of Intent) and the time the transaction is completed.

You need to constantly conduct due diligence activities while operating your daily business because 3 out of 4 businesses fail due diligence. Let's look at 10 areas that most Purchasers look at:

  1. Financial Statements

    Generally, financial statements only summarize the business's activity on a yearly basis and provide a 5-mile high view of the business. The Purchaser then needs to "go to ground" to learn exactly what is going on within the business. Ensure your statements follow generally accepted accounting principles and are reviewed or audited.

  2. The Market

    What is your business doing to protect its current market, to expand, or to grow within the market? The Purchaser needs to take time to survey the market served by the business to determine the future of the market and the nature of the business they are buying. The more compiled market information you can readily provide them with the better.

  3. Sales Activity

    The Purchaser looks at sales channels to determine if they can be easily incorporated into their existing operations. Available sales channels are in many forms such as manufacturers' representatives; distributors and/or wholesalers; commissioned and salaried sales staff and the list goes on. Do you take advantage of all available sales/marketing strategies to achieve maximum sales?

  4. Distribution

    The way a business distributes or delivers its product or services to its customers can vary greatly from business to business. Some ways are more efficient and cost beneficial than others and the Purchaser will want to have a thorough understanding of how your company carries on this part of its business.

  5. Manufacturing / Process

    The Purchaser will want to know whether your manufacturing and processes are current or obsolete or whether there are technologies about to be unleashed which will result in lower costs, but which will require significant capital expenditure to achieve the efficiencies that the new technologies promise.

  6. Environment

    If there are environmental issues the banks will be reluctant to provide financing to the Purchaser. They are not just looking at existing pollution, but at waste generation by the business. Are your wastes properly licensed and being dealt with in the approved manner?

  7. Equipment

    What is the market value of your equipment? What is the life expectancy of the existing equipment? What is the energy consumption of the equipment and is more energy-efficient available? If yes, at what cost and how many years will it take to pay for the capital expenditure of the new equipment?

  8. Record Keeping

    Does your company have detailed records of your operations in such areas as:

    • Sales by customer
    • Sales by product line
    • Gross Margin by product line, by customer
    • Inventory turnover by product line, by customer
    • Manufacturing costs on a per product basis

  9. Legal Documents

    Does your company have all of its legal documents readily available and up-to-date such as:

    • Leases
    • Employment Contracts
    • Customer Contracts
    • Supplier Contracts
    • Franchise Agreements
    • Corporate Minute Books

  10. Facilities

    Is the property leased at market value? Is the space adequate for the company's needs and can the company grow within the current facilities? Is the building meeting all current building codes? Are there any work orders against the property?

This list covers just a few of the many things that a Purchaser looks at when they initiate "due diligence".

Run your business in such a way that you are always on top of every aspect of operations and are able to respond immediately and effectively to inquiries. By being prepared the business will operate much more efficiently; have greater profits; be worth more money and should pass "due diligence".

Now you know why it makes sense to make one of your New Year's Resolutions to be "diligent in 2007"!

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