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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.

  1. First steps
Be clear what you are considering buying. Companies can be co-owned, or have ownership of common assets. With family businesses, you need to understand the business relationship between the owner and family members. There nothing better than meeting with people who understand the business and then those who keep and prepare the management and published accounts.
  1. Management
You must find out about the management. What have they achieved to-date? Do they have a good reputation in the business world? Talk to people who know members of the team well.
  1. Heads of agreement
Get “heads of agreement “ as soon as possible. This gives you a reference point. All deals will be subject to a Sale and Purchase Agreement (“SPA”) and should provide a mechanism to deal with adjusting the price, should a fact turns out to be slightly different from what is recorded in the accounting records.

No one usually sets out to confuse or make it complicated, but as a buyer you need to work through things thoroughly.

  1. Financing
It is essential to arrange conversations with banks or equity providers to ensure the capital/debt or other finance will be there when you need it.

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.

  1. Start up or existing business
The type of business you are looking at is also important.

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.

  1. Results to date
For an existing business you must pay attention to the results to date and the trajectory they show. Understand the cost base to establish how any cash invested might be used to drive the business forward. Inter-linking the current results to forecasts and budgets is a useful exercise. This can help you understand the reasons for any deviations.
  1. Budgets and forecasts
If a company has a budget and a forecast you can assess whether a management team is likely to meet its goals. The forecast needs to take account of the plans for the business post deal – so you can again assess the financing requirements. If, however there is no budget or forecast then you’ll need to look at past performance and make a judgement on how well they are doing.

The comparison between the forecast, the reality and the budgets is crucial. You need to understand whether the team is conservative, racy or fantasists.

  1. Recurring EBITDA (Earnings Before Interest Tax Depreciation and Amortisation)
EBITDA will give you the true recurring profitability underlying all the other figures. It offers a ‘clean’ figure to use for comparisons. The profitability of the business is important to understand to help you determine what you should pay. Understanding this and drivers of the business, and therefore the progression of the profit into the future is vital.
  1. Plan for actions
Someone needs to head up and drive the deal. This means the process and the communication between all parties. Talking to people is vital! I am amazed at how often people say “they knew I was interested. Why didn’t they contact me?”

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.


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: