Before Buying a Business, Due-Diligence is Done

Due-Diligence

In India, for buying, selling or investing in a business we come across with the term ‘due-diligence’. In order to ascertain the true worth of a business, investigation or depth analysis I did. Before buying a business certain things are considered such as the location of the business, and check whether there is any legal issue involved which may land buyer in trouble. Hence before buying a business due-diligence is a must.

Before buying a business various aspects of due-diligence are considered.

Types of Due-Diligence

1. Business

• It starts with evaluating the type and size of business;
• Nature of ownership;
• The position of the business and;
• Products and services with respect to the market;
• Profile of the seller, relationships with suppliers and other channel members;
• Quality of the existing staff, the status of existing leases (in case if any).

2. Financial

• To evaluate the financial health of the business, it is better to seek the assistance of an accountant.
• The request is made for audited financial statements of the business for at least the last three years and if applicable then provisional financial statements for the ongoing year.
• Evaluate the profitability, net worth, cost structure, debt-equity allocation, asset utilization, current ratio and any major outstanding liabilities.
• Financial projections for the next three to five years and ascertain the future potential of the business in an objective manner.

3. Technical

• Evaluate the core technology elements in the business;
• The efficiency of technology used in the business;
• Evaluate whether it can be easily extended to match with future technology;
• Check the licenses and patents for any technological innovation carried out by the business;
• To verify whether there is adequate infrastructure to support the current and future technology.

4. Legal

• In case the business has been served any legal notices then look for legal matters of concern, and to get to know about the present status of such notices;
• Tax compliance of the business;
• Ownership disputes on ownership of the business, any ongoing or past litigations;
• Safety aspects of plant and factory, if any, and so on.

For a buyer, the best time to conduct due diligence is after shortlisting maximum of 2 businesses, which matches criteria to the maximum possible extent. The perfect time to take the deal forward and conduct due-diligence to investigate after satisfying the overall initial assessment of the business.

Reasons for Conducting Due-Diligence

Here are the following reasons for conducting due-diligence:

1. It helps in verifying the issues or concerns in a business which can affect the purchase decision.
2. It helps in gathering inputs which are required to carry out an objective valuation of the business.
3. It is important for managing the future transition in a better and smoother way.

Conduct Due-Diligence

1. For conducting due diligence the best way is to have in place a cross-functional team consisting an accountant, a lawyer, a tax advisor and a business analyst.
2. Create a checklist of documents which are required from the business owner.
3. On a regular basis, tracking of the receipt of such documents.
4. Prepare a list of all the questions for which clarification is required, and periodically share these with the seller.
5. Keep addressing issues in a timely manner.

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