Last month, in one of the employment columns in the Wall Street Journal, the author discussed taking a job in a company that is also laying people off. He concluded it was okay to do so, if you perform your “due diligence.”
Everyone performs “due diligence.” Investment bankers,
potential employees and business buyers. What exactly is “due diligence?”
When it comes to the purchasing of a business, it’s the verification of
what the buyer has been told about the business and its operations.
It is not a time for surprises. It’s the time for the
seller to shine as he or she proves the claims they’ve made about the
financial performance of the company, the management team, the company’s
position in the marketplace, the product capabilities and more.
Here’s a brief outline of a typical buy-sell process and
what happens during each step. Some of the steps involve multiple meetings or
conversations.
The buyer and seller (and possibly the seller’s
representative) meet for the first time. By this time, the buyer should have
established that the business meets his or her basic criteria of location,
business type and proclaimed cash flow.
At either the first meeting or immediately following, the
seller or broker presents the buyer with an overview of the business. This
overview describes the company, its product or service, the market, some
financial summaries, etc.
The buyer will decide if, based on the overview and
the first meeting, the business is worth pursuing. Criteria for pursuit
generally include, the stated cash flow, detailed knowledge of the product or
service, the asking price range and, most importantly, the relationship with the seller.
No relationship, no deal, no matter how good a fit the business is. At the
same time, the seller is verifying the buyer’s capabilities and determining
if he or she feels there’s a good relationship.
At this point the buyer should present the seller with a
non-binding letter of intent detailing the information needed to allow the
buyer to make an offer. This initial due diligence may include analysis of
the lease, tax returns, financial statements, an employee overview, benefit
plans, a customer overview and a description of the market and competitive
standing of the company.
If the buyer is satisfied with the information provided so
far, he or she will make an offer. The offer will usually be contingent on
final due diligence. This may include (but is not limited to):
·
Verifying pricing to key customers
·
Employee agreements and other employee issues (there must
me a good relationship between the buyer, management and the key employees
for this to work)
·
Satisfaction that there is no litigation or court actions
ongoing or pending
·
Environmental studies
·
Customer concentration issues (no customer accounts for
too large a share of sales)
·
Securing a lease assignment and/or extension
·
Supplier credit terms
A good stepped process keeps
everybody on track and prevents either party from investing a lot of time on
something that isn’t going to happen because of something that can be
determined early.
Again, due diligence is the proving of what the buyer has
already been told. As you can well imagine, a surprise in one area will cast
suspicion on everything else. It’s important for the seller to realize
every claim will be investigated thoroughly. The buyer should also understand
the seller will do their best to verify the buyer’s claims of financial
capabilities, experience and character.
© John Martinka 2001. All rights reserved.