Purchasing a company is a huge responsibility. That’s why it’s important to have a list of due diligence questions to ask when buying a business. Anybody serious about selling their company will be expecting plenty of questions from interested parties, so don’t feel awkward about gathering as much information as you can. Performing the proper due diligence should be one of the first steps that a potential buyer takes.
Once you’ve signed the contract, it’s too late to start asking questions, so you’ll need to make sure you’re entirely comfortable with your research beforehand.
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Before you start knocking on doors, there are a few questions you should ask yourself first.
Not every business is bought with the same goal. While everybody will want to make a good profit from their new purchase, it may not be the primary concern. If you’re looking at other factors such as better exposure, stifling a competitor, or diversifying your risk, you’ll need to ask whether the businesses you’re looking at can facilitate these wishes.
It’s usually a safer bet to take on an existing business (assuming it’s in a healthy position), but you may decide that you can do better by starting your own business.
Lots of novice entrepreneurs take on businesses based on their interests and hobbies, then find they don’t know quite as much about the subject as previously thought. Ensure you know your product/service inside out, or at least hire somebody that does.
It can be easy to underestimate just how much time you’ll need to spend on a new business. If you have other commitments, it may be worth considering if you’ll be able to give a business the attention it needs.
Unless you’ve already got experience of buying several companies, it’s strongly advised to seek the guidance of a specialist business acquisition team such as Forbes Burton. Purchasing a business can be a complex affair with plenty of pitfalls, and the help of a third party early on can save a lot of money and time.
As you might expect, there’s a multitude of factors to take into account when acquiring another business. Even our free consultation service can dramatically reduce the chances of you getting stung by unforeseen expenses hidden in your business purchase.
Call our team for free, no-obligation advice today on 0800 975 0380 or book a free consultation
It sounds like a silly question, but if you’re stretching yourself just to buy the company, you may be leaving yourself vulnerable to risk. Businesses don’t typically sell quickly, so you may have time to wait and generate more funds. Bear in mind though, that the business might increase in value in the meantime.
There are several ways in which to buy a company, and you’ll need to find the one that works for you. Most cannot afford to buy outright, so payment plans are often the order of the day. Some may even offer repayments based on the success you have with the business if there are some question marks over the sale.
Searching for the right opportunity can take some time. When you find a good fit, it’s understandable to want to dive in and get any deal sorted. Try to look at as many other alternatives as you can before committing though. You don’t want to spot a cheaper and better prospect just after you’ve signed a contract for something else.
If you’re thinking of buying with a view to expanding your current operation, then it pays to consider how that might look in reality. The new business might use more up-to-date machinery and processes that see your current workforce to struggle to adapt.
If this is to be your only company, will it create enough income for you to live the life you’re accustomed to living? Think about the money you need to make on a monthly basis, and this may help you narrow down potential options. Check the accounts of any business you consider to check that you won’t be worse off.
While cashing in on a current trend can reap short-term rewards, it’s rare that such sales figures can be upheld long term. Investing in such fads will almost certainly necessitate a pivot in the near future.
Whether it’s your first foray into running a company, or you’d simply like to spread the cost/risk with somebody, then it’s possible to go into business with a partner instead. If you’re not the type to work well with others though, you my find this more challenging than it’s worth.
You’ll need to be incredibly stringent on your vetting for potential partners. Going into business with a friend is a sure-fire way to lose friends. You’ll need to ensure that any potential partner is 100% in agreement with you about what direction you intend to take the business.
Ideally, a business should be situated wherever the most potential customers will see it. Companies with such high-visibility premises, though, will come at a premium. You’ll also need to consider your commute. Too far away from your home, and you may be tempted not to come in occasionally. Hopefully, you can find a compromise between the two concerns.
Once you’ve established exactly what you’re looking for in a business, you can start to identify possible targets. There are a few general due diligence questions to ask when buying a business, and these will help you to whittle down your choices to a choice few.
This is one of the most important due diligence questions to ask when buying a business. While there are plenty of owners selling to free up funds, retire, or change career direction, there are also others that are trying to escape from their company responsibilities. These responsibilities could include debts, legal cases, or looming insolvency. If the selling party is trying to offload a problem business, then they’re unlikely to be completely upfront about that, but watch for any apprehension in their answers and investigate every angle that could be an issue.
Don’t give potentially unscrupulous sellers any opportunity to avoid telling you salient information. Ask outright about concerns such as debts. Don’t accept approximations. “Around 20k” may sound like £21k to you, but may mean £30k to them.
These could affect any plans for growth, so will need to be checked thoroughly before any decision is made.
It’s crucial that you find out about any outstanding legal cases, or indeed, any that are likely to arise. These can potentially cost the business thousands of pounds, or even damage the brand. It’s useful to speak to employees to check if there has been a high turnover of staff, or any disgruntled ex-employees recently.
If you’re buying a business in order to expand your own, it’s likely that you’re taking out a competitor in the process. However, if this is your first venture, you’ll need to have a firm understanding of potential rivals. Online businesses could be competing with anybody, but bricks and mortar companies can narrow down their market to a certain radius. Make sure that any acquisition is already competitive enough to withstand pressure from rival firms.
If the company’s rivals have recently expanded, or introduced a successful new business line, this could spell trouble for the company in the future if they begin to eat into its market share. Conversely, if rivals are doing badly, then it could represent a wider industry decline.
It may sound like a silly question given that you should already have a good idea if you’re considering its purchase, but it can throw up some surprises. The selling party may see the business as providing something slightly different to your first impressions. What that is could be a bonus or even a problem, but it’s worth asking.
A long-lasting business doesn’t guarantee stability, but it does show that it’s been resilient enough to last so far. An established company also provides value from its brand. Having been a fixture for so long, it’s likely that the public have come to know of its presence organically if not already through advertising.
A good seller should have mentioned these already, but many still take a passive approach to selling their business that can obscure achievements they should be shouting about.
Perhaps a key supplier folded, or a large client moved elsewhere. By learning from the mistakes of previous owners, you can avoid them yourself.
Don’t assume that a young business has had the same owner throughout. Look out for a succession of ownership changes within a short period. This could indicate issues within the company.
It’s possible that there’s more than one owner of the business, and you’ll need to know if these or any other investors are behind the sale of the company before you run into any potential trouble.
If the business is centred around a special product that isn’t protected, then a competitor can soon copy the same item and render any exclusivity useless. Ask if they have tried to patent their product, and if not, look into the possibility yourself.
If it’s a bricks and mortar business you’re considering, you’ll need to look in depth at the surrounding area. Plans for building nearby might bring extra customers to you eventually, but could disrupt your business during construction. Likewise, if nearby businesses are planning to move away, it could have a knock-on effect on your company by attracting less footfall to the area.
If so, this is a brilliant way to get a grasp on how much your potential acquisition is worth. If the business was of a similar size and sold for less, you can use this knowledge as a bargaining chip in negotiations.
Business valuations are complex and take in a multitude of different factors. There are also several different methods of valuing a business, with each suited to different sectors. If the owner has valued it themselves, then the fee is likely to be out by quite a bit. As you might expect, most tend to overvalue their businesses. If this is the case, ask for an independent valuation from a third party.
There are a number of ways in which to value a business, but completing our valuation calculator will give you the best idea of whether the business you’re looking to purchase is priced fairly.
Typically, a business acquisition would see you take everything on as part of the sale. This includes premises, contracts, leases, debts, staff, and everything else in between. Occasionally though, a seller may decide to just sell certain parts of their business. Be clear in exactly what it is you will receive as part of any sale.
If expensive machinery or equipment is included as part of the deal, try to find out if it has been serviced regularly, or has needed several repairs. Old or badly maintained equipment could become a costly acquisition if they need repairing regularly.
Some businesses are so reliant on their owners that they aren’t viable without them. A talent agency, for example, is dependent on its owner’s list of contacts and relationships that have been forged over years in the business. Buying this company from the owner would potentially leave you with nothing as it’s the owner who is the business.
It can be beneficial to have the seller stay either as an employee or shareholder to help you with the takeover. They know the business inside out, and can provide helpful insights on staff members and processes.
Once you’ve identified a viable business acquisition opportunity, you’ll need to take a deep dive into their finances to ensure everything is as it should be. Sellers should be able to present financial statements without issue to potential buyers. Sellers with vague statements or missing documentation should raise a red flag for buyers. If they’re this lackadaisical with their financial records, what does that say for the rest of the company?
Hopefully, the business you’re interested in will be generating the bulk (if not all) of its revenue through its general operations. If you find that a large amount can be attributed to something else, however, this could be an issue. If the business isn’t supported in the main by its own processes, then it may not be viable.
This should be one of the main questions asked. Revenue does not equal profit, and if operating costs are too high, then profits can be eaten into very easily. You should look at as many years’ figures as possible, but at the very least the last three.
Younger businesses won’t have as much as many records as this, but you should be asking for as many as you can get. Three as a minimum.
Any financial documents relating to the company should be looked at.
Look for any odd deposits that could suggest an outside source propping up the company’s finances.
Most sales will see you take on responsibility for these. Pay attention to contract dates. A favourable-looking rate is only of use if its not due to end soon.
You may be able to spot opportunities for streamlining costs, or even identify risks. If the business is enjoying favourable prices from your main supplier, ask yourself if the business would struggle if those prices were raised to the industry standard.
These reports evaluate how a business generates its revenue, and shows the company’s earnings before interest, taxes, depreciation and amoritisation. This is a great tool for understanding if a company’s valuation seems fair.
It’s often easier to transfer the business account over to the new owner as it will already be set up to take care of wages and suppliers. Setting up a new account and moving everything across can cause potential disruptions, and is best avoided. Any amount currently in the account can simply be added on to the purchase price.
This will help to ascertain what is included as part of the sale. Details need to be exact to avoid complications further into the deal.
If the machinery the company normally uses needs replacing entirely, will the cost of a replacement cripple its finances? Take a look at how much a replacement would cost to determine how much of an impact an equipment failure would make.
Ask to see all tax returns over the last three years, as well as documentation of any investigations or liabilities. If the company has not been paying the appropriate amount of tax, then HMRC will potentially provide a new owner with a financial headache in the future.
Poorly paid staff can see workers move elsewhere. Staff turnover will be high, and recruitment costs may be a factor. If there are skilled staff employed that are difficult to source elsewhere, then the loss of one could be problematic too. In such instances you’re likely to have to spend more for a replacement, or have to increase the wages of the current staff to retain them. Either way, this wage increase should be considered as it would affect the amount of profit the business makes.
If work for new clients is delayed until old clients have paid their invoices, then the company has a cash flow problem. You may be able to see an easy fix for such scenarios, such as shortening payment periods for customers. In general though, this should be seen as a red flag. Companies that can’t afford to take on new work are often at risk of insolvency in the longer term.
If there have been recent growth strategies implemented, are the sellers expecting an upturn in revenue from previous years? If you can see the value in the changes they’ve made, this could have an impact on how you see their business valuation.
A seller is unlikely to answer this candidly if the answer is negative, but looking at statements should give you an idea of how the bank perceives the business as a risk. Constant dips into business overdrafts may hamper any attempts for extra funding in the future.
Perhaps one of the simplest but most important due diligence questions to ask when buying a business. Declining revenues don’t have to be a red flag necessarily, but you’ll need a solid plan in place to arrest the slump.
Some businesses experience dramatic peaks and troughs throughout the course of the year. Beachside businesses, for example, are less likely to do well during the winter months. If the business relies on good weather you will need reserves in place to carry you through a wet summer.
If it’s a good one, then that’s great. Poor online reviews, and negative word of mouth, though, can be difficult to overcome. It will be crucial to make as many people aware of a change in leadership as possible to even stand a chance of disgruntled ex-customers to give it another chance.
A good director will know their business inside and out. This way, they’re able to stay agile to any problems that might arise in the future.
Some businesses rely too heavily on one or two large clients, and this exposes them to a large degree of risk. If one of these clients should fold or move elsewhere it has the potential to have severe ramifications. If this is the case, you may need to check the health of the client businesses too, as well as provide plans to diversify your client base.
You may feel the business has too many, or even too few employees. If so, you’ll need to factor the costs involved into your decision making.
These could include bonuses, compensation, or additional holiday days accrued after time served. It’s important to have a solid idea of what each will cost.
Whether products are manufactured in house, or imported from elsewhere, you’ll need to have a good understanding of the entire journey of the product to identify potential pitfalls in the supply chain or otherwise.
By following a job from order to completion, you’ll be able to spot any bottlenecks or key players within the business.
Ideally a business should have a backup supplier in mind just in case something happens to their primary source. Look around to see if replacing a key supplier might be problematic if you ever had to.
Take a look at the most and least lucrative channels that the business uses. You may find that the business is underutilising a particular method, or is completely missing out on another.
Strong marketing can be the difference between a good business and a great business. If you can see missed opportunities in the company’s current marketing strategy, then a fresh and effective campaign could transform the business.
Certain businesses require the permission of authoritative bodies to trade. If your potential purchase is missing a certification or license, it could be fined or struck off in the future. Check that those that are in place aren’t due to run out soon. Such certification can sometimes be quite costly.
Racks of unsold products can be a drain on profits because of the storage costs. If the inventory levels seem too high, it could be that the product isn’t selling, or that the inventory management isn’t up to scratch.
Some industries will require specialist insurance, but most businesses will have some insurance policies in place. Check what these are, what the potential costs and excesses are, and whether they can be transferred over to you.
Ask you can see, there are a plethora of due diligence questions to ask when buying a business. Purchasing a company can be a huge financial, logistical, and legal headache. With years of experience in helping directors to acquire businesses, we can navigate all the potential pitfalls on your behalf to provide a low-stress way of sealing a successful acquisition.
Call our team for free, no-obligation advice today on 0800 975 0380 or book a free consultation
There are some businesses that only offer one-time services (funeral parlours are unlikely to have returning customers, for example). If the business in question has the potential for returning custom, however, but doesn’t seem to attract any, there could be a problem hidden somewhere.
There are multiple factors to consider when buying a business, and not all fall under the financial or operational side of things.
If the culture of your target business doesn’t align with your own, then a clash could be on the horizon. This can create problems with staff which can result in departures.
If the seller were to lie about certain elements of the sale, a warranty can allow you to seek damages against them. It’s worth checking if the seller is willing represent and warranty any aspects you’re unsure of. If not, this might be a red flag in itself.
Non-disclosure agreements and other covenants are commonplace in business sales. The outgoing director will know all of the company’s trade secrets and can either give them to a competitor, or use them to create a competitor company.
When it comes to due diligence questions to ask when buying a business, this may not be at the top of your list, but don’t let the opportunity to pick the seller’s brain pass you by. Ask them if there’s anything they wish they could have done with the business. You may find that you have the resources or skills that the seller lacked and can make their growth strategy work for you.
The acquisition of a new company can make for an exciting time, but caution should be applied to any deal announcement. Staff and customers can be perturbed by a business sale, and publicity should be handled carefully.
Familiarising yourself with these due diligence questions to ask when buying a business is a great first step, but it’s a lot for one person to take on. We’ve helped countless clients to complete successful purchases of UK businesses. Buying a company can be a complex affair, and by enlisting our help, we can help you to not only avoid common pitfalls, but also guide you toward an acquisition you’re happy with.
Call us on 0800 975 0380, or email [email protected] for a free consultation. There’s no obligation to use our services, and your calls or correspondence are completely confidential. Solid preparation at an early stage can save you significant time and money further down the line.
