How do you decide if buying a business is a good idea and what price to pay? Clive Hyman from Hyman Capital Services says due diligence is a deal process and a lot more than a checklist.
Here are my suggested steps - many of these steps will often occur in parallel.
- First steps
- Heads of agreement
No one usually sets out to confuse or make it complicated, but as a buyer you need to work through things thoroughly.
It is frighteningly common for potential buyers not to have offers subject to due diligence. When you want to close the deal financing must be in place.
- Start up or existing business
If it’s a start up, you won’t be able to see a track record for the business. Be realistic. Work out how quickly the team can make money, i.e. have they got customers ready to buy their product or service? Startups are a risky purchase, as you are reliant on others to get a new product or service to market. Consider waiting until they’ve proved sales can be made.
If you’re looking at a more established business then the next points become even more relevant to your process.
- Results to date
- Budgets and forecasts
The comparison between the forecast, the reality and the budgets is crucial. You need to understand whether the team is conservative, racy or fantasists.
- Recurring EBITDA (Earnings Before Interest Tax Depreciation and Amortisation)
- Plan for actions
Finally, always be polite. Many years ago a strategy manager rudely ejected me from his office and lost £600 million on a sale. The CEO of the potential acquiring company asked me what I thought of the guy – and it turned out both I and the lawyer involved had had the same experiences. So the CEO walked away from the transaction.
Time spent on due diligence will help identify issues. It will allow you to make an informed decision about whether this deal is a go/no go and crucially what you should/should not be paying.
ABOUT THE AUTHOR
Clive Hyman FCA is founder of Hyman Capital Services offering expertise in due diligence and managing change in business including raising equity and debt capital, mergers and acquisitions, interim management, board management and governance, deal structuring, and company turnaround. See: www.hymancapital.com