Strategic Due Diligence And Buying A Business in California

Due diligence typically occurs during the sale of a business, once the price and basic terms of the deal have been agreed upon.

Its specific purpose is to allow the buyer to verify the Seller’s representations and continue with the purchase of the business, or if they feel the details are not accurate, to discontinue any further interest.

It’s also an opportunity for the Seller to check that the buyer will be able to complete the deal. For example, the buyer may need to obtain third-party financing. Due diligence allows the Seller to see if that’s possible.

Additionally, the buyer will bring a down payment to purchase a business, and the Seller may request to see a copy of a bank statement that demonstrates the money is readily available. Perhaps the buyer is asking the Seller to carry some financing in a Seller’s note.

The Seller would, therefore, like to review the buyer’s credit report and credit score to ensure they are a reasonable credit risk.

During due diligence, buyers often focus solely on the historical performance of the business they intend to acquire, overlooking how it’s likely to perform once the deal is complete. What has occurred previously is essential; a buyer needs to know that the historical financial statements of the business are accurate and reliable.

However, for a thorough understanding of the business, including its potential for success or failure, buyers are encouraged to conduct strategic due diligence.

Strategic due diligence explicitly addresses whether a deal is realistic, rather than simply overly optimistic on the part of the buyer. It should be considered in addition to the usual screening processes.

Read More: Here is additional information on the steps to purchase a business.

Strategic Due Diligence

Strategic due diligence assesses a deal and examines its performance from multiple perspectives. This includes looking closely at the health of a target acquisition from a legal, financial, and operational perspective to help determine value, uncover risks, and establish a fair purchase price, including:

1. Market: Is the market expected to continue growing at its current rate, or is it maturing?
2. Technology: Will technological advancements affect the market activity, and if so, how? Is the business using technology worse, the same, or better than its competitors?
3. Competition: How does the business compare with its primary competitors, whether local, regional, national, or international? What is the competitive edge against new market entrants? Are there barriers to entry in this market that make it hard for new competitors to enter? What type of consolidation or divesting activity has recently occurred in the industry?
4. Customers: Not only identify major customers, but also understand their buying decisions. Do they buy because they have a strong relationship with key personnel? Are there any negative indicators, like service or product complaints, low loyalty rates, or delinquent payments? Go online and research comments to determine whether they are positive or negative, and to determine customer experiences and patterns.
5. Pricing: Is it high volume, low margin, or vice versa? Is the price used as a differentiator against competitors or new market entrants? Does their pricing policy fit with the future direction of the business and where the buyer wants to go? Is the industry changing and will, therefore, affect future pricing, and is this positive, neutral, or negative?
6. Management: Will the existing management team be able to deliver on the deal’s anticipated value? If the answer is yes, why? Do you think the management team can adapt to change? A new owner, by default, brings new ideas and approaches to doing things. Look for managers who can adapt to change and are capable of implementing decisions quickly. These characteristics will be crucial during the integration period.

Strategic due diligence is about research, and good research equals more confidence in making the right acquisition decision and strategy. It requires an investment of time and resources, but you’ll also reap significant returns. In addition to contributing to an estimate of the company’s market value, the research results can help you communicate any strategic rationale to your investors, lenders, the board of directors, employees, and other stakeholders.

Strategic due diligence also facilitates a smoother and more successful integration.

If you would like more information about buying a business, please visit my website, Buy a Business, or purchase a copy of my book, Successfully Buy Your Business.

Further Reading:

1. Due Diligence When Buying a Business 
2. Do Due Diligence or End up in Do-Do
3. Financial Due Diligence When Selling a Business 
4. Due Diligence: What it is and What You Need to Know
5. Financial Due Diligence When Selling a California Business
6. Commercial Real Estate Due Diligence Checklist

For more immediate help with buying a business, you are welcome to send an email to Andrew Rogerson or Call Toll-Free at (844) 414-9700