M&A Due Diligence Checklist

I want to buy a business. What is next?

When someone makes the decision to buy a business, there is a set of things to do until you start managing and scaling your new business. First of all, you have to decide which kind of business you are going to acquire. Immediately, you start looking for the best option. You can do that for yourself or work together with a partner that brings you the best opportunities. If you have no money to acquire the business, you have to look for funding… All this process could be stressful… What about due diligence?

 

One important phase when you buy a business is due diligence. By this point, you have already selected your perfect deal and have made an offer to purchase a business. You have probably met with the owner, reviewed the financials, and obtained funding for your acquisition. However, you will need some information verification before the deal is finally closed.

What is due diligence for buying a business?

Buying a business involves a lot of twists and turns. One of the most important is completing due diligence, the process of researching and analyzing all the data regarding the business you want to acquire before you sign the purchase agreement.

 

Due diligence is a specific process for evaluating a business transaction before the deal closes. All areas of the company are included in it: Finance, Sales, Legal, Marketing, etc. It is important to focus on possible discrepancies and to verify value.

 

Due diligence used to be a condition of the buyer’s offer. If during the process, there are any problems uncovered, this is the time to deal with them. Be sure you have enough time for this part of the process because it is time for questions. Ask one and another until you get satisfactory answers.

 

For doing this phase of your acquisition process as well as possible, we share with you all the information you have to include in your due diligence. Let’s go with our checklist for buying a business.

 

What to include in a due diligence checklist?

When you are buying a business, a due diligence checklist must cover several aspects of the prospective business: information about business structure, operations and customer, financial data, material contracts and employee information, legal and tax issues and all included in intellectual property. Let’s go further into these aspects.

#1 Marketing and Commercial information

All you need to know about business positioning, sales, customers’ behavior, competitors, market trends, etc. should be covered in this first point.

 

At Boopos, we connect with the main business merchant accounts (Amazon, Shopify, eBay, Magento, Square, Woo Commerce, etc) to get the most relevant information about the business. This connectivity simplifies this part of the due diligence process saving both time and costs. By accessing the business merchant accounts and analyzing data, we get information about sales history, advertising and stock but are also able to assess and verify best matching keywords, reviews, ratings, ranking, market penetration or trends in the industry, sales history, strength and origin of your competitors, differential product offering, and customers acquisition and retention, among others.

 

#2 Financial Process

This includes audited financial statements for at least 2 years, ideally more. When we analyze business to acquire, we prioritize businesses with more than 2 years of history, although if your business has existed for less than 2 years, it may still be doable.

 

Which information is included in this financial statement?

  • Revenues by marketplaces.
  • Refunds and Returns.
  • Cost of fulfillment by the marketplace.
  • Cost of landed products by the marketplace.
  • Cost of Amazon selling fees by the marketplace.
  • Marketing costs.
  • Inventory and accounts payable.

 

#3 Facility, Supply, and Inventory Analysis

Does the business have any partnerships or suppliers? Review which obligations or agreements are in place, fixed assets, facilities, equipment, product quality assurance, and safety…

 

Inventory analysis is done in almost every single case and last-in, first-out (LIFO) and first-in, first-out (FIFO) costing methods should be considered.

#4 Company Management and Employees

A list of employees and contractors and the jurisdiction could be required. When you are doing due diligence for a business acquisition, it is important to have an organization chart with all executives and board members, as well as copies of all employment contracts.

 

This could be a perfect opportunity to meet all team members. Identify who the key employees are and what their responsibilities are. Find out if any of them plan to leave the company and think about different ways to incentive them to stay.

 

#5 Legal Structure

Make sure that the company you are about to acquire and everything surrounding it is in a good legal position. That means that you need to know about any outstanding legal issue or ongoing litigation of the company, meet who represents it and verify if proper insurance, licenses, and permits are in place. Additionally, review any agreements and contracts in place with relevant third parties -logistics, suppliers, contractors, etc.

#6 Tax issues

Make sure the correct VAT and sales tax has been applied to your figures and some specific deal structuring elements depending on the jurisdiction you operate.

 

#7 Intelectual property information

Review and verify intellectual property information, including trademarks, copyrights, patents, or other exclusive intellectual information that is owned by the company.

 

Last word of advice

As we have said, most of the information required for this due diligence comes from a business merchant account. However, buyer-seller interaction is crucial in this kind of transaction. Which is the main goal of this interaction? On the one hand, clarify information provided and understand business issues, on the other hand, discuss expectations and anticipate deal-specific issues.

 

A last word of advice would be for you to have your business always ready for potential due diligence, even if you are not planning to sell in the short term.

 

 

 

Sources

 

https://acquira.com/how-to-buy-a-small-business-the-full-checklist/

https://www.bizbuysell.com/learning-center/article/due-diligence-checklist-what-to-verify-before-buying-a-business/

 

Ohad Shapira

Ohad Shapira, Agency CEO, online entrepreneur, and digital nomad. Leads the agency since its inception. Ohad has a variety of digital assets and holdings in various businesses in the online fields

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