Evaluating a potential business acquisition
Deciding whether a business is right for you is a complex process. The following are some of the questions we can help you answer.
- What are the critical factors that make this business a success? How will these factors be impacted when the business is sold?
- What are the major risks facing the company? How will you manage them?
- Do government policies affect the business? How likely is it that those policies will change?
- Are there synergies/economies of scale that could be realized when you merge the new business into your existing business?
- Is the business cyclical? How does that affect cash flow and working capital requirements?
- Are there any contingent liabilities, outstanding warranties or unresolved lawsuits against the company?
- If you plan to make changes to the business what will they cost and how will you pay for them?
- What are the real opportunities for future growth?
- Are you buying at the top, bottom or middle of the business cycle?
Management and Employees
- Is it an easy or a difficult business to manage?
- What specialist knowledge/experience is required? Do you have that knowledge?
- Who are the key employees? What will be the impact if they leave? Can they be replaced? Are they covered by existing management contracts? Have the key employees signed non-compete or non-solicitation agreements? Are they underpaid in relation to the market? Will you be able to meet with them prior to closing?
- Are wages and salaries at market levels?
- Is the staff turnover rate reasonable?
- What intangible assets will you be purchasing? How secure are those intangibles e.g. have patents been taken out?
- Are the fixed assets in good condition? Is there deferred maintenance?
- What will you have to spend on capital assets over the next two or three years?
- Is the company technologically up-to-date? What will it cost to bring it up-to-date?
- What systems does the company use? Are they working properly?
- Are there surplus assets that could be sold?
- How important is the current location? Is there alternative space readily available? What would it cost to move?
- What is the condition of the lease? Can it be transferred to a new owner? How long does it have to run? What are the renewal options?
- What are the company's major products? Are they all profitable? What would be the impact if some were discontinued?
- Is the company operating at capacity? What is the capacity?
- Are margins changing? How do the margins compare with the industry?
- Who are the major suppliers? Are there alternate suppliers?
- Does the company have any major non-arms length relationships with customers, suppliers etc? What would be the impact on the business if those relationships ceased?
- What is the customer composition? What would be the impact on the business if it lost several large customers?
- How would customers react if prices were increased by 5% or 10%? How would that impact profitability?
- Does the company have a sales order backlog? Is it growing, declining, etc?
- Who are the major competitors? How significant is price competition?
- How easy is it for new competitors to enter the industry?
- Do you understand the financial information? Do you have the ability to properly interpret that information? Should you involve your financial advisors?
- Are the company's books of account well maintained?
- Are the owners reluctant to provide financial information? Why?
- Are the accounts receivable collectable?
- Does the firm have a good relationship with its bankers? Will you continue with that lender or start afresh?
- How good is the inventory? Does it include old or slow moving inventory that needs to be written off?
- Are there any environmental concerns relating to the business?