What Due Diligence should be carried out when buying another business?

Whether you're approached by a competitor, a supplier, or you've identified a target company yourself, understanding the complexities involved in the acquisition process is critical. In our latest blog below, our Managing Director, Les Leavitt, advises on some key factors to focus on during the due diligence process which you should review before committing to a deal.

Acquiring another business can be an exciting opportunity for growth, but it also requires careful thought and thorough due diligence. At LWA, our team of expert advisors has guided many clients through the complexities of business acquisitions by providing the insights and support needed to ensure a successful deal. At LWA, our team of expert advisors has guided many clients through the complexities of business acquisitions by providing the insights and support needed to ensure a successful deal.


Financial health considerations

A thorough examination of the target company's financial position is the cornerstone of the due diligence process and crucial to understanding its true value and long-term viability. You’ll need to assess the company’s balance sheets, profit and loss statements, cash flow projections, debts, assets, and liabilities.

This helps you understand the working capital requirements and identify any potential risks, such as outstanding debts or unrealistic financial projections. It also gives you a clearer idea of the company’s true value, helping you avoid overpaying.

As an award-winning firm of accountants and business advisors, LWA has extensive experience in conducting financial due diligence across various sectors. We pride ourselves on offering more than just number crunching – our modern approach combines expert analysis using the latest tools and technology with personalised advice, ensuring you understand the full financial picture of any acquisition.

 

Operational structure and processes

Assessing how the business operates day to day is important in determining whether it’s a good fit for your existing company. This includes reviewing its internal processes, systems, supply chain, and human resources.

Understanding the operational strengths and weaknesses of the business will help you determine if the company can integrate well with your own systems or if there will be challenges that need addressing.

Through LWA’s in-house tools and technology, we can offer real-time insights into operational data, including stock management, order processes, and resource allocation, to evaluate the effectiveness of the business's operations. This allows you to assess whether the target company will integrate seamlessly with your own, or whether adjustments are necessary post-acquisition.

 

Legal obligations

Understanding the target business’s legal standing is crucial. This involves reviewing its compliance with industry regulations and verifying its legal history, including any existing or potential legal disputes, intellectual property rights, contracts, permits, and licenses.

Checking for unresolved legal issues upfront can help you avoid inheriting liabilities and ensure that the acquisition runs smoothly from a legal standpoint.

In addition, if the business is reliant on proprietary technology or intellectual property, assessing the protection and ownership of these assets is key to avoiding costly legal battles down the line.

By working together with our trusted legal contacts, our team at LWA can collaborate with your legal advisors to ensure every aspect of the business’s legal standing is clear, reducing the risk of future litigation.

 

Market position and growth potential

You’ll want to carefully analyse the target company’s market position, including its competition, current market share, and future growth potential. It’s also important to stay on top of industry trends and shifts that may impact the business.

A detailed market analysis will give you insight into whether the business aligns with your overall strategy and how it will contribute to your company’s growth.

At LWA, we offer advanced financial forecasting tools that allow you to model different scenarios, helping you identify the working capital required and spot any potential risks like unreported debts or unrealistic financial projections. By using these tools and leveraging our business planning tools and cloud accounting services, you’ll be equipped to determine whether the business is worth the investment and how it can contribute to your growth.

 

Client and supplier dependencies

A thorough review of customer and supplier relationships is essential to understanding how much the business depends on key players. If the company is heavily reliant on one or two clients or suppliers, this could pose a risk to the future stability of the business. Evaluating these relationships also helps you gauge brand reputation and customer satisfaction levels, both of which are critical to long-term success.

Our team can help you evaluate these relationships, offering insight into revenue streams and contract reliability. This evaluation will also help you understand the company’s brand reputation and customer satisfaction levels, both critical for long-term success. 

 

Workforce review

A business is only as strong as its team, so reviewing the target company's workforce is an essential part of the due diligence process when determining how well the workforce will integrate with your own. This includes looking at employment contracts, benefits, employee turnover rates, and overall company culture. People are one of the most important assets in any business. 

Through our thorough knowledge of payroll and in collaboration with our HR and legal contacts, LWA can support this review by working with your HR team to ensure that employment terms are competitive, benefits are aligned with industry standards, and any potential cultural conflicts are addressed.

It’s important to ensure that the employees you acquire as part of the deal will integrate smoothly into your existing team, without causing disruption to your business operations.

 

Synergy opportunities

One of the most exciting aspects of an acquisition is identifying synergies that can create additional value. Whether it’s through cost savings, improved efficiencies, or new revenue streams, understanding how the target business will complement your own is key.

LWA’s expertise in business forecasting allows you to evaluate potential synergies and model how the merged businesses will operate together. We can help you pinpoint where efficiencies can be made and where opportunities for revenue growth exist, maximising the value of the acquisition. Synergies could mean the acquisition provides more value than you initially thought, offering additional competitive advantages for the combined company. 

 

If you’re thinking of buying a business, contact LWA

At LWA, we offer more than just accounting services. With our networked services, cloud accounting and business planning tools, we provide real-time insights and strategic support to help you navigate the complexities of an acquisition. From financial forecasting and market analysis to operational efficiency reviews and legal compliance checks, we work with you every step of the way to ensure you make informed decisions.

Our expertise in advising businesses on mergers and acquisitions, combined with our tailored financial tools, ensures you are fully equipped to carry out comprehensive due diligence. If you're thinking of acquiring a business, contact our team today to find out how we can help you achieve success - email mail@lwaltd.com or you can call us on 0161 905 1801 in our Manchester office or 01925 830 830 in Warrington.