As business advisors we regularly prepare custom due diligence checklists for our business purchase clients.
A robust due diligence process should cover the financial, commercial and legal elements of the business, in considerable detail.
We’ve covered this detailed due diligence process in a number of eBooks and checklists, so for this blog I am just going to give you my three top tips when conducting due diligence:
- Watch for material discrepancies – Once I asked for some information on sales by key customer by month. When I tried to tie the information back to overall sales reported in the financial statement, they were out by more than 20%.
During further queries I received three different reports responding to the same question, all with different sales figures. I was left frustrated and lacking confidence as to the real position. -
No information is a bad sign – If the business owner or their advisor is not willing to provide information in a timely manner to satisfy your due diligence requests, this may be a sign something is wrong – caution is best!
Of course, if they simply can’t provide the information because they don’t record it in the format you want, then be flexible – there are often alternative ways to satisfy your analysis.
If the business owner is suggesting the information is commercially sensitive and therefore won’t provide it, again this might be a legitimate reason, but sometimes your query can be satisfied by sanitised summary information, or provision of remaining material post contract exchange. -
Be prepared to walk away – If the core premise of the business opportunity substantially diverts from your critical requirements at any time during the process, be prepared to walk away.
The last thing you want is to be about to sign the contract and thinking: “Even though it doesn’t meet my requirements, I’m here now and have spent all this money and time, I’d better go ahead.”
If you would like support to conduct due diligence on a business opportunity, contact the business advisory team at JPAbusiness for a confidential, obligation-free discussion.
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James Price has over 30 years' experience in providing strategic, commercial and financial advice to Australian and international business clients. James' blogs provide business advice for aspiring and current small to mid-sized business owners, operators and managers.