Did you know that over 67,000 companies joined as members of the Dubai Chamber of Commerce in 2023 alone? What happens when these business owners are looking for an exit strategy? Starting a business from the ground up isn’t the only way to become a successful entrepreneur.
In fact, acquiring an existing business has a slew of advantages, from an established brand image and customer base to reduced startup times and added financing options. When it comes to acquiring a business, due diligence is non-negotiable. In this article, we’ll cover the due diligence processes every acquisition needs, helping you maximize the success of your next purchase.
Tax Due Diligence
Tax due diligence dives into the target company’s tax affairs, analyzing past filings, correspondence with regulators, and upcoming obligations. For example, if you close on your acquisition before year-end, who pays the tax bill? Are you on the hook for a tax liability that you had no part in creating?
Tax due diligence also evaluates the terms of the deal to find a mutually beneficial tax outcome. For example, there are stock acquisitions and asset-based acquisitions. Each of these acquisitions creates different tax outcomes. Finding the most favorable purchase option is a core component of due diligence.
Legal Due Diligence
Would you want to walk into an ongoing lawsuit? Probably not. Legal due diligence examines every legal aspect of the acquiree, including contractual ties with shareholders, ongoing lawsuits, contracts, the status of licenses, and expiring patents. For example, if you are buying a software startup, they probably have existing patents and trademarks on their products. If these items are set to expire in the next few years, the market could become saturated, leaving you in a less-than- ideal position.
Uncovering all the legal implications the business has and will have is an important step in due diligence. It’s also important to do independent legal due diligence. Will a company be fully transparent with its lawsuits? They will most likely give you the bare minimum details.
Financial Due Diligence
The numbers matter. Financial due diligence analyzes the financial performance of the company in the past and projects where the numbers will fall in the future. Financial due diligence also looks to uncover any instances of fraud or misappropriation. For example, if the company has three-year-old receivables on the books, are those really collectible?
When a company is looking for a buyer, they try to make their books appealing. Digging into the factors of each account will help you determine what the true financial health of the company is. Due to the reporting intricacies of financial statements, it’s best to work with a qualified accountant.
Operational Due Diligence
What current operational procedures are in place? How is the company culture? Evaluating the operational side of a target acquiree is just as important as the financial and legal sides. In this stage of due diligence, you will understand how the company converts its inputs (labor) into outputs (revenue).
Operational due diligence can also give you insights into how you will alter operations once the deal is finalized. For example, if you find that the company is using old and outdated technology, you can have new resources and training ready to go for employees.
Information Technology Due Diligence
Technology has become an integral component of running a successful business. As a result, analyzing the info tech of your prospective acquisition needs to be on your due diligence list. Look at the current infrastructure. What does the company excel at? What aspects might need work?
Pinpointing any efficiencies before you purchase the company is crucial. You want to understand the upfront cost of reworking old systems and how these changes will impact operations and profitability before you close the deal. These processes are especially important if you are purchasing an online business.
Finding Your Next Acquisition
Are you ready to find your next acquisition? If so, it’s important you have a clear outline of the due diligence processes you will need to implement. You should gather as much information as possible about your target company before the deal is finalized. Once you sign on the dotted line, you are responsible for the business going forward.
If you are looking to jumpstart finding your next acquisition, head over to BUSINESS. We have an extensive list of startups, online businesses, and traditional businesses for you to choose from. Being an entrepreneur doesn’t mean you need to start a business from scratch. Consider purchasing an existing business!