Due Diligence Before Buying a Business: What, When, Why and How

We often come across the term ‘due diligence’ in the context of buying, selling or investing in a business. Simply put, it is the investigation or in-depth analysis of a business in order to ascertain its true worth. We can compare it to the process of buying a property (e.g. a house) for ourselves. Before we buy a house, we check the location, try to determine whether the house is in good condition, check if there is any legal issue involved which may land us in trouble, and so on. Similarly, before you buy a business, conducting due diligence on that business is a must.

Now, let us try to understand due diligence better by considering the various important aspects of it.

What Are the Different Types of Due Diligence?

Business: Begin by evaluating the type and size of business and its nature of ownership. Evaluate the position of the business and its products and services with respect to the market, the profile of the seller, relationships with suppliers and other channel members, quality of the existing staff, status of existing leases (if any), and so on.

Financial: It is best to seek assistance of your accountant to evaluate the financial health of the business. Request audited financial statements of the business for at least the last three years and provisional financial statements for the ongoing year, if applicable. Assess the profitability, net worth, cost structure, debt equity allocation, asset utilization, current ratio and any major outstanding liabilities. Also, request financial projections for the next 3 5 years and ascertain the future potential of the business in an objective manner.

Technical: What are the core technology elements in the business? What is the efficiency of technology used in the business? Is it state-of-the-art and cost effective? Can it be easily extended to match with future technology? Are the licenses and patents in place for any technological innovation carried out by the business? Is there adequate infrastructure to support the current and future technology?

Legal: Look for any legal matters of concern, such as if the business has been served any legal notices and the present status of such notices, status of tax compliance of the business, any disputes on ownership of the business, any ongoing or past litigations, safety aspects of plant and factory, if any, and so on. You can further deepen your analysis specific to a particular business and get professional opinion from your legal advisor.

When Should You Conduct Due Diligence?

As a prospective buyer of business, you will come across a number of attractive business opportunities. The best time to conduct due diligence is after you have shortlisted your prospects to a maximum of 2 businesses, which match your criteria to the maximum possible extent. Once you are certain that the business seller is genuine and has a clear reason for selling the business, that there are no obvious red flags in the business as per your initial analysis, and that you are satisfied with the overall initial assessment of the business and its reputation, it is the perfect time to take the deal forward and conduct due diligence to investigate the business in depth.

Why Should You Conduct Due Diligence?

Due diligence on a prospective business is a must for buyers because –

  1. It helps them find out any issues or concerns with the business that can affect their purchase decision
  2. It helps them gather the inputs required to carry out an objective valuation of the business
  3. It is critical to manage future transition in a better and smoother way

How Should You Conduct Due Diligence?

The best way to conduct due diligence is to first have in place a cross-functional team consisting of an accountant, a lawyer, a tax advisor and a business analyst. Create a checklist of documents to be requested from the business owner and keep on tracking the receipt of such documents on a regular basis. As your team proceeds with the due diligence process, request them to keep a list of all the questions for which they need clarification, and share these with the seller periodically. Don’t leave anything for the last minute, keep addressing issues in a timely manner.

So, are you ready to buy a business soon? We have helped thousands of buyers and sellers discover their right match through our platform and have helped many of them close their deals successfully as well! To know more about what we do and how we can help you, please write to us at [email protected].

How to Identify a Potential Buyer and Go About the Deal-Making Process

As a small business owner, it can be challenging and confusing to understand how to sell your business, especially if this is your first time. Over the last few years, we have supported thousands of business owners in the journey of selling their business, and have found that one of the most common questions that business sellers have is this – how to identify potential buyers for their businesses?

In this article, we bring to you the key insights we have gained through our platform on the essential aspects to be kept in mind when identifying a potential buyer for your business, and how to go about the overall deal-making process.

Identifying Your Target Buyers – Streamline Your Efforts

When it comes to buyers, we have seen many sellers waste their efforts by reaching out to the wrong target audience. It is advisable to start your buyer-identification process by profiling the ideal buyers from your business. For example, are you looking for individual buyers, institutional buyers or both? Are you only looking for buyers within your industry or are there related / complementary industries you are willing to explore? Are you looking for buyers in a certain location? This will help you streamline your outreach campaigns (online and / or offline) and reach out to the maximum possible buyers in the shortest possible time.

Being Discoverable – Critical to Reaching Your Target Buyers

Sellers often spend time and money putting advertisements anywhere and everywhere. Focus on the being discoverable – identify options that give the maximum visibility for your sale proposition, but make sure your confidentiality is not compromised. Dedicated technology platforms like IndiaBizForSale are excellent for making your sale proposition searchable and discoverable by potential buyers. No matter where you advertise, make sure you create an attractive business brief to catch the buyers’ attention.

Handling Buyer Inquiries and Qualifying Prospective Buyers – Do’s and Don’ts

The real process of identifying a potential buyer for your business actually begins when you start receiving inquiries (interests) from buyers. Try to ascertain how serious the buyer is – Does he respond to your communication on a timely basis? Does he ask the relevant questions about you and your business? Is he ready to sign a Non-Disclosure Agreement (NDA) before you share any critical or sensitive information with him? Does he understand the deal-making process? Classify buyers by their genuineness and credibility and share detailed information only with the buyers who are qualified according to the assessment criteria set by you.

Handling Due Diligence and Getting Your Business Valuation Right

Once you and your buyer have established trust between yourselves, it is important to understand the process of Due Diligence. The buyer will usually have a team of professionals who will investigate your business extensively. It is important that you prepare for this stage right from the day when you decide to sell your business. Make sure your books of accounts, business incorporation documents, title and ownership documents, process documents and policy documents are all in place. Having said that, Due Diligence is so much more than just documents – a seasoned buyer is likely to analyse your business’s reputation, position in the market, customer satisfaction, and technology aspects, as applicable. For valuing your business, it is always advisable to take help from an experienced, expert valuer with credible track record. This will help in negotiating with the buyer and also give you a realistic expectation about the asking price of your business.

Negotiations and Deal Structuring – Get the Best from the Deal

At this stage, it is important to have a seasoned deal negotiator on board who can negotiate on aspects such as transaction modes (cash vs non-cash), payment timelines, title transfer timeline, distribution of part-payments (if any), and your post-sale involvement in the business. Apart from this, you will also need to discuss legal and compliance implications, such as tax liabilities, licenses, and so on.

Closing the Deal and Managing Transition

The final leg of the deal-making process is closing the deal – i.e. receive your due payment from the buyer and give the ownership of your business to the buyer through transfer of title. While it is usually a simple process, sometimes there are minor hiccups along the way to watch out for. For example, we have seen a few deals where last-minute conflicts have arisen due to the buyer / seller not fulfilling certain pre-defined terms and conditions. We usually mediate in such situations on request, and help the buyer and the seller reach a consensus through discussion.

Selling your business doesn’t necessarily need to be an overwhelming experience. With our wide network of thousands of buyers, experience, and expertise, you will be in a better position to pursue a deal successfully. To know more about what we do and how we can help you, visit IndiaBizforSale.com.