Choosing to acquire another business is a large financial decision and not one to be taken lightly. While a company might seem to be running well on the surface, there may be hidden aspects of the business that prove to be unsavory. That’s why it’s critically important to take deliberate steps to assess a company’s overall health before taking out a business acquisition loan and signing on the dotted line. Here are six things to consider.
Figure out how the business fits into your plans
Every investment you make serves a future purpose, whether putting money into a 401(k), buying a home, or purchasing a business. As you think about acquiring a business, ask yourself what purpose it will serve in your portfolio.
Maybe you want to buy a business where you can be a full-time employee. Finding that company will look very different than if you want to use a business for passive income to retire early. In that case, you’ll research businesses that run smoothly with limited owner oversight. Once you get clear on your intention for the business, you can begin to look for companies in industries that match.
Understand why the business is for sale
Before diving into the business financials, which are an extremely important part of the acquisition process, it’s critical to understand why the business is for sale in the first place. Some common reasons an owner might sell are:
- Retirement
- Change of interest or passion
- New opportunities
- Health challenges
- Moving away from a physical location
- Burnout
- Poor business performance
- Changing market conditions
While many items on this list are easy to understand, the last three might trigger a red flag and encourage you to ask deeper questions. If the owner is burned out, what about the business operations could change to remove the need to be hands-on day in and day out? Are you capable of changing the company’s poor performance, or is that a symptom of a bad product or service? Can you overcome the changing market conditions that are causing someone to sell?
Simply asking these questions during the earliest stages of assessing a business can save hours of your time, energy, and potentially money down the line.
Review the financials
If you’ve zeroed in on a business that’s selling for reasons you’re comfortable with, it’s time to open the books. As you dig into the company’s money, be sure to request information including:
- Tax returns
- Balance sheet
- Profit and loss statement
- Assets (including physical equipment, inventory, real estate, and intellectual property (IP))
- Debt burden (including lenders, balance owed, loan terms, and interest rates)
- Cash flow
- Insurance policies
- Financial projections
- Customer list
- Business credit history
While you can typically gauge business health by reading these documents, it makes sense to hire a financial professional or lawyer who is experienced in business acquisition to help you go through them and protect your best interests. A professional may be able to point out areas of concern or ask relevant questions based on experience. If the financials don’t make sense, it’s likely time to move on to other options. If the financials check out, you’ll want to dive deeper into the everyday operations.
Look into the employee experience
Assuming you want the business to keep running after you acquire it, you’ll be taking over responsibility for an existing staff of people. That means that during the due diligence period, you’ll need to understand the workers and how they operate. Ask the owner to provide:
- Employee list (including titles, compensation, and tenure)
- Organizational chart
- Job descriptions
- List of non-employee contractors and advisors who support the business
In addition to this paperwork, it’s also critically important to talk to key employees and see how employees talk about the company using transparency sites like GlassDoor. The last thing you want is to acquire a business with low employee morale and then discover you’re struggling to hire new employees when the time comes.
Get to know the product or service
If a company builds a physical product, take time to examine it and understand the customer experience. You’ll want to understand the complete inventory of products that the company sells, how much the company makes on each one, and how those products are delivered to customers. Similarly, with a service business, try the service if you can. If you can’t, consulting online reviews or speaking with previous customers may make sense if possible.
Understand the company’s reputation
One of the intangibles of the due diligence process is digging into a company’s reputation. A reputation can develop in many different areas. For example, employees might have a different experience than customers who have a different experience from vendors. Talk to as many people as possible who interact with the business in different functions. Doing so can give you a feel for how the business shows up in the local community and whether consumer sentiment is rising or declining.
The bottom line
The due diligence process before buying a business is extensive for a reason. Ultimately, you want to take a 360° look at the business from financials to employee and customer experience and community reputation. Diving deep into each of these areas can help you spot red flags early and avoid surprises after the purchase. A reputable acquisition specialist can help you properly assess a business’s strengths and weaknesses to ensure you get the right fit for your long-term goals.
Also Read: Unlocking Business Success Through Savvy Financial Management
