Preface: Blog continued from Part I

Due Diligence Assessment – Part (II)

Small business due diligence is best performed as team. What probes do you need when performing due diligence? The following list are questions to help get you on the right path.

Employees are an important asset to any business. What is the expertise of management? Does the businesses products or services require special schooling, or licensing? Is the work desired among community members? What compensation is paid, i.e. is it market rate, how does it compare to industry? Is labor unionized? What key management roles are in the business? Is there a board of directors? Is there a hierarchy in the business? Does the business develop talent? Is the business in compliance with labor laws and work environment compliance? What is the human resource policy?

What is the current year net income or loss? What is the previous year net income or loss? Who prepared the financial statements, i.e. CPA or management? How much reliance do you place on the accuracy of the financials or tax filings? What is the current year top line revenue? What is the previous year’s top line revenue? How do revenues compare to the competition? What is the current year gross profit margin? What is the previous year gross profit margin? What is the brand value? Can the brand be leveraged? What beta does the brand have to marketplace trends? How recession proof is the industry? What is the value of business intangibles, i.e. patents, trademarks, or other intellectual property, e.g. employee expertise or processes?

What detail is available on specific revenue channels, e.g. products, services, category, country, or dealers or distributors? What is gross margin by revenue channels? How does profitability and income statement margins compare to the industry? What projections or budgets are available for projected sales and corresponding expenses in future years? What is the three year top line revenue trends? What rate are business top line revenues increasing, i.e. are top line revenues climbing or declining? What is the industry trend? What is the condition of company assets, i.e. property, plant and equipment? What is the ideal structure of the business? How much leverage is involved? What liabilities will be assumed? Is the company safely capitalized? What is free cash flow? What staff will remain with new management? What risks are being assumed, are any tax or product claims outstanding or pending? What liability guarantees has the company made or warranty representations?

Does the company have pricing power in the marketplace, i.e. can you increase prices and profitability; is the marketplace vibrant? What does the company’s current accountant(s) say about the business? What concerns do they have about the financial reporting or performance?

After you have assessed the above questions, and they are not a comprehensive list, only a starting point, you will have more understanding of your decision on the business synergy you are contemplating. What do you think? Due diligence is hard work, requires time and money, and sometimes leads to additional questions. Don’t rush due diligence, because it can be the difference between success or mediocracy on making a business acquisition work. And, don’t do the due diligence alone, unless you have years of experience buying and selling businesses. Retain trusted the accountant(s) and attorney(s) you need to properly scope the situation. If your business is Yankee foliage tours, you appreciate predictable seasons. Real dollars will be on the line, and like a Yankee autumn, prior performance is only an assumption of future performance, but actual performance will typically contrast.