Whether an individual is investing in the acquisition of an existing business through a merger, stock transfer, or asset transaction, due diligence is imperative. As one of the more important parts of the acquisition process, the perceived success or wealth of a business shouldn’t make you overlook this step. While a thorough examination of the organization should be centered around a financial review, it should encompass more than this if you truly want to protect your investment.
All industries have their own practices, lingo, and equipment. If you aren’t versed in the practices of a particular industry, the seller could literally tell you anything. Hire an expert to work as a consultant during the process who has experience in the area of specialty for the business.
For example, unless an individual has direct experience in the culinary field, it might be more challenging to assess the need and value of any equipment offered as part of the acquisition. Without this expert, an investor could end up purchasing equipment in the transaction that they don’t have any need for or at an unfair cost.
Ask your financial consultant to perform a competitor review on the business based on their revenue forecast report. The average seller wants to make their business as attractive as possible. Sometimes this involves overpadding their projected future earnings figures.
Overpaying for a business based on a false projection jeopardizes the entire investment. A financial consultant can compare the forecast report with competing brands to look for any discrepancies. For example, a business with a projected growth of 15% per year might serve as a red flag if the average business within that same industry only reports about a 2% growth annually.
Potential success of a new acquisition is partially hinged upon the ability to integrate the existing technology of the business into any current systems you use. If you fail to perform a thorough due diligence in this area, you could end up holding the bill. The cost of redesigning a noncompatible system to integrate with your current system is time-consuming and expensive.
The stress of this task should be reflected in the financial offer you extend to acquire the business. As an investor should have a thorough IT review performed to ensure the new system will be compatible with any systems they currently operate.
The goal of any investment is an earned return. Due diligence helps ensure an acquisition will help you achieve this goal.