10 Due Diligence Tips for Business Acquisition and Buy Outs

The acquisition of another business to bolster an already existing company is a fast, efficient way of achieving business growth almost overnight – that is, if it’s done correctly. And of course, given that a large proportion of acquisitions are undertaken due to there being some form of instability or issue, mergers and acquisitions that go wrong can be both frequently seen, as well as potentially financially devastating.

So, with the rates of acquisitions unsurprisingly soaring during the finance crisis, and having seen another peak in 2014 (where takeover deals the world over amounted to a staggering $3.34 trillion, or a 47% increase based upon 2013 figures [Growth Business UK 2014]) we’ve taken some time to look at acquisitions; moreover, we’ve looked specifically at some essential steps that companies must take before seriously considering the merging of two companies, and here they are.

  1. Hone in on the cash flows/EBITDA

Much of an acquisition bid is based, quite rightly, upon the company in question’s targeted cash earnings from operations that were recorded prior to Interest, Taxes, Depreciation and Amortization (EBITDA). And in order to identify a normalized/’run-rate’ EBITDA correctly you must always be sure to exclude all non-recurring, non-cash items (this includes gains or losses from acquisitions, divestitures, discontinued businesses or fixed asset sales).

  1. Get your hands on accounting policies

Accounting policies can be the difference between a company that looks financially viable upon paper, and a business that is in reality sinking without hope of salvation. So be sure to consider the company’s accounting policies upon: revenue recognition, accounts receivable and inventory detailing.

  1. Weigh up the worth of assets and working capital

The assets and working capital of a potential acquisition company must be sustainable for a merger to be viable. For this due diligence would involve the study of financial records upon revenue and margin trends when applied to whatever variable makes sense (be this in relation to specific customers, product lines or distribution modes).

  1. Look into the current tax standing of the company, in detail

Tax varies in importance from company to company, however in every merger it’s essential that the acquiring company has a solid understanding of any tax liabilities going onwards. Key questions to ask/considerations to undertake would then include:

– The taxes that have been paid over the last five year period,

– Any official, governmental audits and the results of such audits,

– Any agreements that may either waiver tax liabilities, or extend the tax statute of limitations,

– Any relevant correspondence between taxation authorities and the company in question.

Additionally, here is a good list from the British Business Angels Association. 

  1. Consult other specialists from your team

A solid due diligence team will consist of numerous specialists so that a true and accurate idea can be gained upon every element of the business in question, and its true financial and potential future financial worth. This may mean that such a team consists of experts within the following specialisms: human resources, tax specialists, commercial/business growth, IT and finally experts that may be specific to your line of business.

  1. Paw over historical revenue records, as well as cost trends

The interested company of any potential acquisition must always analyse historical revenue, and decide whether such levels can be sustained. They must analyse this all the way down to product line revenues and customer revenues, as is relevant.

  1. Don’t forget the financial worth of technology and intellectual property

Technological or intellectual property can be of significant worth within an acquisition and is important for the integrity of due diligence according to Aperio-Intelligence so ask:

– Does the company have either domestic or foreign patents?

– Does the company own any copyrighted products, materials or trademarks? And do they all belong solely to the company?

– Conversely you should ask whether the company is infringing on another’s intellectual property, and whether there may be litigation on the horizon. 

  1. Discuss debt and debt-related items

Financial leverage is of course gained through factors such as debt and debt-related items. However you should specifically consider whether there may be debts or debt-like items that you need or want to exclude form the deal. Debt-like items may include factors such as operating/capital leases, unusual employment agreements or financial guarantees. 

  1. Analyse how solely historical results fair against budgets and forecasts

When historical financials are fully understood the process should move onto comparing the actual historical financial results, against previous budgets and forecast. Specifically this should answer the key question as to whether the company in question has achieved its projected targets, and if not then it should be asked why not. This can help provide insight into current forecasts that may have been presented as part of a potential acquisition, which in turn may lead to further leverage upon the purchase price (or, conversely, may render the acquisition as a complete no go). 

  1. Consider contracts – Customer, supplier and employment

When undertaking due diligence it’s important that any potential buyer considers customer, supplier and employment contracts as per the acquisition package; after all, it is these most likely extensive documents that under pin and ultimately define business processes.

Specifically however you should look towards factors within these contracts that demonstrate any control provisions, the expiration dates of the agreements and finally any future or recent increases/decreases in either customer or supplier costings or pricing.

So that’s it. The ten essential steps towards paying your due diligence to an acquisition. Well, that is as far as can be generically covered. You see with any business deal such as a merger there will always be unique sets of circumstances that apply to those two businesses, and always being well aware of such quirks is essential in ensuring that an acquisition is right for both your company, as well as the company to be merged. So always adapt your strategy and continue to consult with specialists who can provide rock solid insider advice in areas where you may less than an expert.



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