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Due Diligence – Do I need to worry about it if I am not selling my business?

Due diligence is generally considered an activity that takes place as part of the selling process. It might be wise for you as a business owner to take a look at the business from a buyer’s perspective in performing due diligence as part of an annual review of your business.  Performing a “Self” due diligence does two things: (1) It provides a valuable assessment of the business by company management, and (2) It offers the company an accurate profile of itself, just in case the decision is made to sell, or an acceptable acquirer suddenly appears at the door.

This process, when performed by a serious acquirer, is generally broken down into six basic areas:

         Financial due diligence
         Legal due diligence
         Management/Employee due diligence
•         Marketing due diligence
         Environmenmtal due diligence
         Operational due diligence

Financial Issues

Two important questions have to be answered before getting down to the basics of the financials: (1) Do the numbers really work? Is this business viable? and (2) Do the financial statements support this?  Once these questions are answered, you should carefully review:

• Accounts receivable (what does the aging look like, and how collectible are the accounts in reality?)
• Accounts payable (who are your major suppliers?  do you have supplier agreements in place?)
• Inventory (does it consist of new parts, or does it include used parts?  Is there real value there, or should the inventory be written off?)
• Who prepared the financial statements?  Year end externally prepared financial statements are considered more reliable than internal financial statements when viewed by a third party.  The accountant will provide some valuable advice on your financial statement preparation.
 

Legal Issues
Are contracts and agreements current? This is extremely important with recurring revenue contracts like monitoring. Not only does it represent a contract for your services itemizing billing and term (automatically renewable are best), but it also limits your liability.  All lease contracts (office equipment, vehicles, facilities) should be readily available.  Are products patented if necessary?  How about copyrights and trademarks?  What is the current status of any litigation?  Are there any possible law suits on the horizon? What would an astute attorney representing a buyer want to see, and would it be acceptable?

Management/Employee Issues
How integral is the company owner to the future of the business—would the customers/employees leave if the owner left?  What employment agreements are in force?  Does it cover the key employees at a minimum? What family members are on the payroll? In other words, who does what, why, and how much are they paid? Also, if subcontractors are used, are they really subcontractors or they effectively employees of the company?

Marketing Issues
It has been said that many company officers/CEOs have never taken a look at the broad picture of their industry; in other words, they know their customers, but not their industry.  For example, here are just a few questions concerning the market that due diligence will help answer:

 
What is the size of the market?
• Who are the industry leaders?
• Does the service or product have a life cycle?
• Who are the customers/clients, and what is the relationship?
• What is the risk and potential of your market?

Environmental Issues
Not too long ago this area would have been a non-issue.  That is no longer the case.  Current governmental guidelines can levy responsibility regarding environmental issues that existed prior to the current occupancy or ownership of the real estate.  Possible acquirers – and lenders – are really knowledgeable, and for the most part, “gun-shy” about these types of problems.

Operational Issues
The company should have a clear program covering how their service is handled from initial customer contact through delivery of the services.  Is there a complete listing of all monitored accounts, including billing and service site information? Do you estimate jobs and compare the estimate to the actual when it is done?

Do you give your company a "physical" now and then., or do you wait until someone else does it for you - with a lot riding on the line?  It pays to know how your company truly stands. 

Regelle Partners is a business brokerage/mergers and acquisition firm with a niche focus in the Canadian security industry.  Regelle helps business owners sell their companies by initiating and managing the business sale transactions.