Greetings, aspiring business owners! If you’re in the exciting process of acquiring a company, you’re likely aware that due diligence is a crucial step in ensuring the success of your investment. Dave from AFX Search, a team of licensed investigators, is here to share valuable insights on what to look for when conducting due diligence on a potential business purchase.
Unveiling Deeper Insights
While financials and pro forma statements are essential components of due diligence, Dave emphasizes the importance of digging deeper to uncover the true nature of a business’s operations. Let’s explore key areas to investigate during the due diligence process.
Verify Income Sources
One of the first steps is to scrutinize the sources of income listed in financial statements. Ensure that deposits into the company’s bank account align with the described client allocations. Be wary of artificial deposits that merely create the appearance of activity without genuine revenue.
Client Retention: A Crucial Metric
Beyond financials, assess the client retention rate. Investigate whether the business maintains a stable book of clients or relies on constant acquisition of new clients. Covertly approaching clients or engaging third parties in casual conversations about the business can provide valuable insights.
Historical Business Variations
Examine the business’s performance over the past 12 months. Sudden increases or decreases in activity may indicate artificial manipulation to present a more favorable picture for a sale. This can be particularly crucial in understanding the true health of the business.
Look into the company’s employee landscape. Are there records of employees leaving, and if so, why? Analyze payroll records and census data. Engage with current and former employees to gain insights into the internal workings and culture of the business.
Owner’s Role: Profit vs. Compensation
Evaluate the role of the owner within the business. Sometimes, what appears to be profit may actually be compensation for the owner’s role. If the owner’s duties are substantial, replacing them may require significant additional costs.
External Market Forces
Consider external factors influencing the business. Changes in laws, market competition, or big expiring contracts can significantly impact the business landscape.
Asset Ownership Verification
Ensure that the assets listed, such as construction or building equipment, are owned by the business. Verify asset ownership with UCC filings to rule out any potential obligations tied to the assets.
Scrutinizing Earning Sources
Examine the authenticity of earning sources. Sometimes, businesses may cut prices dramatically to boost revenue artificially without a corresponding increase in profit. This tactic may impact the sustainability of the business.
Leveraging Human Intelligence
Dave encourages buyers to go beyond numbers and leverage human intelligence. Engaging in conversations with clients, vendors, and even those who sell products to the business can provide nuanced insights that may not be evident in financial statements.
AFX Search: Your Partner in Due Diligence
While accountants and attorneys offer valuable perspectives on financials, AFX Search specializes in human intelligence and investigative due diligence. For more information or if you have specific questions about buying a company, visit afxsearch.com.
Empowering Your Business Acquisition Journey
Due diligence is the cornerstone of a successful business acquisition. Dave’s expertise from AFX Search illuminates the importance of going beyond the numbers and thoroughly investigating various aspects of the business. Armed with comprehensive insights, you’ll be well-equipped to navigate the acquisition landscape with confidence.