by Al Fialkovich, Managing Director at Transworld Business Advisors
There is no doubt that building a business from scratch can be a daunting task. Yet many people fail to consider that buying an existing business is a challenge of its own. Obviously it is already established, operating on a model that is at least somewhat successful, and provides a proven service to a dependable customer base. But in the eyes of an outsider debating whether to put a large sum of money of the line, the inner workings of the business can pose tremendous uncertainty.
The task of vetting a business prior to a potential purchase is referred to as due diligence. The would-be buyers examine every characteristic that could impact their future investment. The safest practice is to compile a comprehensive checklist applicable to the type of business and intentions behind buying it.
Although an appropriate checklist would vary between industries, there are five rules for any investor to follow:
1. Hire a CPA.
Many business owners forego the advice of an expert accountant because they have financial/accounting experience or are cutting costs by taking responsibility into their own hands. But even if they are a stellar accountant, a doctor would not operate upon their own body, and the same principle applies.
First off, a CPA will save you time by doing the same work faster than you while providing a valuable third party perspective. The time saved can be put towards revenue-generating activities and possibly go well past paying the charge of the CPA.
They will be more meticulous in tracking down any unseen cash flows and corresponding with sophisticated government requirements. Failing to meet these duties could result in financial ruin, so their payment can be treated as a sort of insurance policy.
2. Hire an attorney.
There are many stages during the purchasing process that will require professional legal counsel. A lawyer can first help decide if the business is even worth buying. They have better methods of scanning the business for a variety of hidden legal troubles, for example, conducting a proper lien search and even a criminal background check.
Make sure to find an attorney with experience in mergers and acquisitions. By corresponding with the CPA, they can help value the business, determine the most favorable tax structure, and aid in price negotiations. They can also scrutinize contracts and other legal agreements to make sure there are no hidden clauses that can cause troublesome disputes later on.
3. Efficiency is essential.
Most speculators will find the due diligence process to be tedious at best. There is no reason to make it more complicated than it needs to be.
While compiling all of the facts and figures, the record-keepers may not even consider differentiating between the data that matters and that which does not. A prospective buyer should only be concerned with the business’s future performance, and some past indicators may distort that vision.
For example, if the new owner would apply sweeping changes to any area of business – such as introduce a new marketing plan – past figures from related areas may suddenly become irrelevant. If revenue has been falling because the manager was too ill to attend to his business or from the actions of employees you plan to replace, then none of these numbers should influence your decision.
4. Prepare wisely.
Such a heavy investment assessment may be slowed down by the need to arrange discussions between all interested parties. Business owners are assumed to naturally stay busy, so coordinating schedules between multiple owners can be challenging. So before the meeting does happen, everyone better do their homework.
Since these types of decisions are rarely negotiated by unimportant people, be sure there is enough justification to call a meeting together, as everyone’s time is valuable. All parties should study any relevant information beforehand so they know which questions need to be asked when meeting face-to-face.
5. Move quickly.
A buying experience gone stagnant can turn stale at a moment’s notice. Once nearing the end of the process with the finish line in sight, wearisome delays can hastily erode the goodwill of the seller.
If there are signs of anything suspicious, inquire further and move closer to a “yes” or “no” instead of wading in uncertainty. On the contrary, if nothing is suspicious, procrastinating may cause the seller to believe you think otherwise and poison relations around what should have been a mutually beneficial deal.
The mere mention of the phrase “due diligence” likely intimidates some, but it shouldn’t. Its difficulties can be easily managed through effective planning and execution. All in all, it is a necessity to building a better tomorrow for your organization, as you would only be going through it if you predicted worthwhile benefit from the outcome. If ever discouraged, remind yourself of the end game and make each step pleasant and positive for all players involved.
Al Fialkovich is the Managing Director at Transworld Business Advisors, a boutique merger and acquisition firm helping visionary entrepreneurs buy and sell companies. He has been involved in transactional work for 12 years, selling three of his own companies in multiple industries and working in various CFO roles.