The Acquisition Process and Due Diligence

By Fred Silberstein, CPA

If you read the previous article on valuations for profitable businesses, it may have piqued your interest.  This article focuses on the acquisition process from both the perspective of being a buyer or seller. 

One of the ways to grow your business is to acquire a competing business.  If you are interested in buying a competitor but do not know what businesses are for sale there are few different ways to pursue.   Alternatively, you may decide to sell your business.

PROSPECTING
Talk to your local distributer and peer groups.  Consider a direct mail campaign through an M&A professional.  Once you have a viable candidate both parties should sign a confidentiality agreement to protect the information exchange.

Next through the help of advisor and preliminary observations of the business, you work up an offer and present a non-binding letter of intent, which would have various caveats, but both parties would agree to the terms of the deal.  Upon execution of signed letter of intent the buyer or buyer’s representative would than perform Due Diligence.

DUE DILIGENCE
Operational Due Diligence-this is where you would look at the seller’s operations of the business.  How does the prospect price?  How do they market?  How do they compensate the employees?  What are the employee benefits?  Legal Review.   Review of Insurance Polices.   The person in charge of the overall operations of the Buying Company should do this.  

Financial Due Diligence- this is where you look at the books and records from the seller to determine the accuracy of the information provided.  This is done in accordance with GAAP (Generally Accepted Accounting Principals) and books should include various accruals and allowance for doubtful accounts. Etc.   A team of CPAs should lead this.

Upon completion of both the financial and operational due diligence, the buyer will determine if they will still honor the terms of the Letter of Intent.  Many times, buyers will discover material adjustments that could cause the deal to fall through.   If after completion of Due Diligence, both buyer and seller want to move forward either through honoring the initial deal or as a result of adjusted terms, the legal process commences.

LEGAL PROCESS
At this point during the transaction stages, lawyers are brought up to speed on the overall deal terms.  Both buyer’s and seller’s attorneys should work together to try to memorialize the deal terms.  Beyond the financial terms of the deal the following items should also be completed:
 

  • Employment Agreement (term and amount).  The amount should be consistent with valuation.
  • Non Compete and Non Solicitation Agreements
  • Lease
  • Assignment of Contracts
  • True Up vs No True Up (Working Capital Adjustment) 
  • Closing Balance Sheet
  • Reps/Warranties and Schedules that are attached to the agreement