Due Diligence | Part 4 | Operational Issues
In today’s post we continue exploring the depths of the due diligence phase of purchasing a business. We’ve already discussed the financial issues and the legal issues, and today we’ll look at the operational issues surrounding due diligence. We’ve highlighted four important questions to answer regarding operational issues of a business you’re looking to purchase.
What products or services does the company offer?
It may seem like a no-brainer to most, but it is important to acquire an in-depth knowledge of the products or services of the company you’re purchasing. In many cases, the purchaser is well aware of the products or services because it is the products or services of the company that attracted the purchaser to the deal. The better you know the products and services, the easier it will be to assess the market you are entering, forecast future revenues, anticipate shifts in consumer demand, and the costs it will take to operate the company.
Who operates the company’s day to day activities?
Some companies have one general manager or CEO that operates the business. That person may be an integral part of making sure the business continues to operate without a hitch. Does he or she have an employment agreement? What are the terms of the agreement? Is he or she obligated to stay with the company despite a change in ownership? Unless you plan to take over managing the day to day activities of the business, it’s important that you hold onto those employees that manage the company.
Are there other key employees that drive the company’s operations?
For many businesses, there are certain employees that are necessary to the company’s success. It’s important to identify those key employees and review any employment agreements or compensation packages tied to those employees during due diligence. There may be an executive that is due a large bonus or whose stock option plan will vest next year. Or there may be a key engineer or designer that could leave the company. A purchaser that fails to recognize these issues surrounding key employees may end up owning a company with diminished value. A seller, on the other hand, can maximize its value by ensuring that key employees are retained and obligated to continue performing for the purchaser.
Are there key customers and suppliers that are necessary to maintain the company’s business?
Another important consideration is the key customers and suppliers. Many companies rely heavily on the income generated from just a few customers. Other companies rely heavily on a small number of suppliers in order to produce and sell their products or services. It’s important to recognize these key customers and suppliers. Further, it’s important to review the terms of any contracts with those key parties in order to understand the rights and obligations of the business and its customers. In some cases, it is worth requiring the business owner to introduce you to the key customers and suppliers in order to begin building a relationship with those individuals. Purchasers often require business owners to sign a non-compete agreement that restricts the business owner’s ability to “poach” key customers and suppliers after he or she sells the business.
The more you know about the business, its operations, its employees, and its key customers, the less likely you’ll encounter unanticipated obstacles when you take ownership of the business.
If you’re interested in learning more about due diligence, selling a business, or purchasing a business, please check out our blog series and contact us to schedule your free consultation today.