Business Development Solutions

The Merger & Acquisition Resource for Growing Companies

Eleven Potential Deal Killers To Spot Early

Acquiring a business can take a substantial amount of time. Therefore you should conduct a pre-due diligence investigation to identify any potential deal killers before very much time and expenses are committed. You should have a reasonable level of comfort that potential acquisition candidates fit your criteria and have a reasonable chance of being acquired successfully.   These issues also affect the price that you may be willing to pay for a business.  Items to review:

1.      The Company.  Background information on the company, owners, and management.

Why is the owner selling the business? Is the business solely dependent on the current owner and does it have good management? Does the business have an organization chart and description of the function of each position?  Get a summary of the experience, education, and accomplishments of each key manager.

2.      The Asking Price.  Specifies what is for sale (assets, stock, or real estate), the price, and terms.

Based on a review of several thousand Business Sale/Acquisition transactions, the actual sale price of a business is from 50% to 100% of the asking price advertised by business brokers. Of course, if you believe a business is only worth 50% of the asking price; you may not want to spend a substantial amount of time on the potential deal before getting a general understanding with the current owner on the price.

3.      Products/Services.  What are the competitors' products/services and how does the company compete effectively with them? What are the competitive strengths and weaknesses of the company?

What is the profitability of each of the major products?  If the profits come from a number of products, the business will be worth more than if most of the profits come from just one product.

4.      Industry.  What are the status, trends, and financial standards of the industry?  Is the industry growing and the company's marketing share expanding?  Base industry growth trends on third party estimates.

5.      Customers. Do most of the sales come from just a few customers or from a broad customer base?  What are the profitability levels for key customers?

6.      Competitors.  What is the market share information for the company and competitors? How do competitors interact with each other? Is the intensity of the competition fierce, moderate, or passive?

Obtain competitor credit reports or any other available information to understand competitor financial status or other relevant information.

7.      Marketing Plan.  What are the marketing activities of the company? This includes overall strategy, pricing policy, methods of selling, advertising and promotions.

8.      Weaknesses, Strengths, Opportunities, and Threats.  What are the important risks, assumptions, and problems?  What actions or strategies could you use to overcome these problems?

There are risks to buying a business. However, you need to reduce your risk of the unknown by identifying the risks and problems. Are there potential solutions so that those risks can be managed?

9.      Geographic.  If you will have to relocate your home, how is the area as a place to live?

10.   Production/Operating Plan. What is the production method or delivery of service?

Is the company well run?  Does the company have internal company reports that indicate that decisions are made with timely, accurate information? Does the current owner make all decisions?

11.   Financials.  Obtain a copy of financial statements over the last three to five years. Prior to selling the business, the current owner probably reported as little profits as possible to keep taxes low. The financial statements should be recast to show the true earning power of the business.

If there is a large backlog of orders, is it profitable? Obtain a copy of the asset list.  Does the company have old equipment that will have to be replaced soon? Are accounts receivables current? Is inventory obsolete?

How do the business's financial ratios compare to industry and competitor averages? If they are worse than the averages, can they be fixed? The financials need to be scrutinized in great detail.

Because you are interested in the future, prepare financial forecast. Does the company generate enough cash flow to pay off the debt, generate an Internal Rate of Return (IRR) for the equity you put into the deal, and provide you a salary to live on? 

If there are skeletons in the closet that would prevent you from buying a business, it is better to find out about them early in the process.  This list includes just the highlights of the issues that should be reviewed before any offer is made on a business. After an offer is accepted, a much more comprehensive investigation is required.


Call if you have any questions on the above article or to find out more about buying or selling a business.

Business Development Solutions

Jay Whitney, President