Understanding The Business Due Diligence ProcessByCerkez Lena
Whether you are selling a business, or looking to acquire one, chances are you will employ a vetting process that exams the financials status, business growth prospects, legal standing, structure, customer relations, employee relations, contracts, and many other areas of the business. It is the due diligence process that will determine whether the business you are considering to acquire will prove to be a viable investment, or not. If you are the seller however, understanding the due diligence process will help prepare you to tighten any loose ends, as well as help you negotiate with confidence to secure the best price possible.
Here are some of the areas that will likely be vetted, and why:
• Financial Statements - Investors are attracted to businesses that generates a profit, more than that they are attracted to accurate financial statements. This will give an investors confidence that the business can generate a profit under the current structure. Investors will verify the accuracy by contacting your vendors, and customers directly. Income Statement, Balance Sheet, and Cash Flows are all subject to this review.
• Forecast Reports - Investors will request a forecast for the seller to demonstrate future growth prospect by requesting a five-year forecast. Investors want assurance that a decent rate of return is earned on their invested capital, in addition that the business has a sustainable model that continues to grow and appreciate in value. In addition to providing a five-year forecast under the current structure, you can emphasize other areas that the business can branch into once under new ownership.
• Management Structure - The investor examines the management structure to determine what makes the business work. This is particularly important to the investors, because they may seek a business that almost runs itself. It requires competent managers, proper level of authority among management structure, and delegation. If it takes a key person to determine the end all success of the business, not a good sign, as soon as this person decides to move on with their life, or retire the business will collapse. A business with redundancies and contingency planning is often desired.
• Contracts & Pending Litigations - This review will disclose any litigations that the business may be facing, this however is not necessarily a deal breaker. Most investors will work language in the buyout agreement that indemnifies them from litigations that may have started while the business was under the old ownership. Investors want to review current contracts in place, whether related to vendors or customers. Customer contracts sometime contain language that voids the agreement if change in ownership ever occurs.
This is meant to provide you an overview of the due diligence process, and the mechanics involved that can help you get the best buck for your business. If however you are on the buyer side of the transaction, you will have an idea of what to look for in a business prior to making the purchase. At the end of the process an offer is either made, or the parties go their separate away.
Article Source: http://EzineArticles.com
Copyright © 2014 Cerkez Lena All Rights Reserved
|
