Buying a Business: Your Due-Diligence Checklist

Buying a business doesn’t have to be complicated if you are prepared and organized. You don’t have to go through the process yourself, but here at BuyAndSellABusiness.com, we’ve worked closely with many enterprising buyers who have.

Here are some of the questions they ask before they buy, and what steps they take while conducting due diligence. You should too.

Are the stated revenue/expenses valid?

The first thing to do is gather bank statements and log all customer charges from the last 18 – 24 months. You need to identify all customer revenue and compare it against overhead (expenses). The same goes for bank credits and all major expenses.

What’s the customer concentration?

Use data from your findings above to create a pivot table that shows customer revenue as a percentage of total for the previous last year (other sources might include partnerships or advertising). I would also recommend additional diligence for top customers. Consider conducting interviews to verify customer health (time as a customer, ability to pay bills on time, etc.), assessing personal relationships to owner, and so forth.

How does the business acquire clients?

Interview the sales team, review purchase order requests, understand what the sales/marketing activities are and calculate the customer acquisition cost. You should determine if they have systems to acquire clients or if they need highly skilled sales reps.

How critical is the owner to the business?

We talk a lot about the importance of buying a business that is not dependent on the owner. Interview the seller and ask very detailed questions about the key components of operations. If the seller can provide all the details, they might be in the weeds (which is not good). Moreover, you need to determine if the seller’s stated role jives with the organization chart. Who’s doing what?

What investments will you have to make post closing?

While reviewing expenses, look for opportunities for adjustments to pay, benefits, sales/marketing, staff, etc. Create normalized financial statements based on these gaps to enhance profits. You should also assess capacity utilization (T4 + T4A + temp/part time hours). Can the business grow without investing in more equipment, people, IT, office space, etc.? Are current resources being used to their fullest capacity? Make sure to measure this against industry benchmarks.

How does cash flow in and out of business?

Not only how, but how fast? Compare time of invoice vs. when the payment was received for top customers. You should also calculate account receivables as a percentage of sales and compare trends from previous years. Review the terms of top customer payments and gauge your ability to dictate more favourable payment terms moving forward.

What is the value of the assets?

Review the balance sheet and asset value from tax returns. Conduct an internet search to determine the market value of equipment over a certain dollar threshold. You may also want to factor intangible assets such as the brand, IP, or customer lists, but it depends on the type of business you are buying.

Are the business’ expenses adding value?

Finally, you’ll need to validate expenses against bank statements. Assess whether the expenses were critical to business operation or not. This will also help you assess whether the business is valued appropriately.

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