“Due Diligence” information – What do I need to know. Part 11

This is the last blog post in this series on the information required for a thorough due diligence and it will consider how all the information mentioned in the series comes together to form a picture of the state of the business. To read the series from the beginning please scroll down to the post on 12 May 2014.

As with most things in life, running a business effectively is all about finding the right balance of where to put energy (and finances). Unfortunately this does not guarantee success since that also requires a viable business model and market but not striking the right balance guarantees that the business will not be as profitable as it can be or even a decline into bankruptcy.

At its core, the most fundamental business information is a comparison between the money the business makes and the money it spends and all this information can be gleaned from the information sheets on the BusinessPortal range of websites. Then one can drill down into the separate costs (for Human Resources, Business Processes (operations), Sales, Marketing, financial costs due to Assets and Liabilities, research and development, tax costs) and incomes (Invoicing for separate Products and Services) to determine where the company might be improved. Note that the BusinessPortal range of websites do not specifically consider tax costs and that I’d suggest using costs and invoices excluding VAT/GST to get the most accurate picture of the business. Checking that tax and VAT/GST returns (in the relevant countries) are up to date, submitted and paid is absolutely critical to a due diligence though. After all, one buys into a business with all its promise and baggage.

Financial Statements attempt to provide similar information about the running of a business and generally they will give a good idea of the overall state of the business. They do, however, have some significant limitations. They provide a snapshot at a point in time (the financial year end of the business) and thus, don’t give much of an indication how the business got there. When several years of financials are analysed this gives a better idea but it should still be remembered that accounting standards force them into a format that might not adequately represent all facets of the business and that businesses tend to “have their house in order” at their financial year end to avoid unnecessary tax implications. Having a complete and audited set of financial statements does indicate that the administrative side of the business is well organised though.

There are other, less tangible or -quantifiable things to consider when buying into a business. Examples are the company’s ethos, -customer relationships, the strength of its brand, its dependence on key people in- and outside its structure, its corporate social responsibility, the strength of alliances with suppliers and clients, the strength of competitors, industry conditions and standards, economic conditions etc. Though a SWOT analysis may have hinted at some of these issues, there is no way of pinning down the impact of these (and indeed of an ownership change) on the business.

Doing a due diligence also requires a balance. Though all the information mentioned in the posts preceding this one should be available to all businesses, the size and selling price of the business may not justify the amount of time spent to dig it all up and analyse it. The BusinessPortal range of websites were set up to encompass the vast majority of the information required for a thorough due diligence but it should also be noted that this information cannot be verified by the website. It is thus up to the negotiating parties to determine the amount of effort that needs to go into the due diligence. As with most negotiations, there will always need to be some level of trust. For more information on business negotiation, check out my blog on “Business Negotiation”.

There is no absolute bare minimum requirement for a due diligence and businesses have been sold on trust in the people involved and in the brand in the past. This approach is rare nowadays however, and generally only happens in businesses that are being sold to a friend, family member or long standing employee or manager. Generally, there will be extensive negotiations based on available information or assumptions and this offers a multitude of opportunities for deals to fall through.

All of the preceding blog posts considered the information requirements on a business during a due diligence. Most of this information is highly sensitive and will thus not be given lightly. Since a trust relationship needs to be built between negotiating parties there will be information requirements on the buyer/investor as well. Generally this will start with a Non-Disclosure Agreement that gives identification details and ties the parties into confidentiality regarding the deal and any information that may be required for it. Then there will need to be some way of assuring that the necessary funding is available (proof of bank balance and income, credit checks, pre-approved loans, assets that can be used as collateral for loans as well as liabilities etc.). It should be noted that often a portion of the funding can be paid over time and can be generated by the businesses trading activity under new ownership though this will depend on the eventual structure of the business deal.

Business deals on this level (selling a business, finding a new partner, looking for investors and looking for mergers) are a daunting prospect. From advertising to find an appropriate investor to going through the negotiation and due diligence to money swapping hands and contracts being set up and signed there are many pitfalls and unknowns that need to be overcome. For more information on the business selling and buying process, check out my blog “Infographic: The Process of Selling/Buying a Business”. Subsequently there is no shortage of service providers that offer to help through some of these processes (brokers, accountants, lawyers etc.). The BusinessPortal range of websites have endeavoured to provide a structure to help with finding investors, guiding the negotiation and simplifying the due diligence for the vast majority of businesses out there (irrespective of size and industry). Though we don’t expect a deal will ever be made without face-to-face meetings, meaningful personal- and business relationships are being built online and the structure provided can educate and inspire buyers and sellers in this complex market. For more information on how the BusinessPortal range of websites endeavour to do this please check out the parent website at www.businessportal-global.com and the explanatory YouTube clip with the link below.

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