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Key Due Diligence Topics

When buying a business, due diligence is EXTREMELY important. This is where most deals fall apart – the proverbial skeleton is discovered in the closet – the value of the business isn’t what buyers perceived it to be, so they walk away.

Before committing to a deal, buyers want to know the asset they’re getting is not impaired due to unknown issues.

Due diligence is especially important in private company transactions, as they are not subject to regulation and their information is not public. Most companies engage an M&A specialist to help with due diligence, as it is an exhaustive process and they know what to look for.

Below is a list of the most commonly analyzed areas in due diligence:

  • Financials – reviewing to ensure the validity of profits and cash flow
  • Technology & Intellectual Property – review IT infrastructure and any patents, trademarks, etc.
  • Customers & Sales – understand the company’s customer base and retention
  • Strategic Fit – how will the pieces work together once merged?
  • Legal & material Contracts – review of all material legal contracts of the business (i.e. lease, debt agreements, employee agreements, etc.)
  • Employee Issues: assess health of the HR function and employee relations
  • Litigation: review any open/pending litigation for contingent liabilities post-close
  • Tax Matters: determine any open liabilities or any carry-forward assets
  • Regulatory Issues: ensure compliance and evaluate completeness of adherence
  • Insurance: is the business properly protected against risks and will additional coverage be necessary post-close
  • General Corporate Matters: review organizational documents and corporate records
  • Environmental Issues: audit for risk of hazards or noncompliance
  • Related Party Transactions: any direct or indirect interest by an owner or other stakeholder in the business
  • Government Compliance & Compliance with Laws: audit for completeness of compliance
  • Property: review of all real estate, leases, land, etc.
  • Operations or Production Issues: evaluate workflows, key vendors, processes, etc.
  • Marketing: review marketing strategy, vendors, channels, etc.
  • Competitive landscape: review company’s market share and industry landscape
  • Online Data Room: secure, shared, cloud-based storage of all due diligence files to ensure all parties can access and review
  • Disclosure Schedule: Seller’s schedule identifying any exceptions to the company’s representations and warranties or diligence disclosures.

As you can see, this is an extensive list, requiring many, many hours of preparation. Get started as far in advance of a transaction as possible, as it will cut down costs and speed time to close. It also protects transaction value – if a buyer is unclear or has any doubts over key strategic areas of cash flow and value, it will likely lower the amount they’re willing to pay, or they may walk away all together.

A Quick Tutorial on Small Business Loans

Your news feed is full of headlines touting stock market performance and how the President’s tax cuts are going to help the economy.If these headlines continue to prove to be true, small business lending will continue to thrive in 2018. For the first time since before the start of the Great Recession a decade ago, big banks are now approving one quarter of the loan applications they receive. (Forbes, 2018)

According to the latest Biz2Credit Small Business Lending Index, loan approval rates at big banks climbed two-tenths of a percent in October, up from 24.8% in September.

So, with banks loosening up capital, SMBs now have more facilities available to them to get started or to grow. Banks, both large and small, provide small business loans, mainly to more mature and established businesses. For those just starting out, you’ll have a better chance of getting a loan from a traditional bank with an SBA-backed loan. SBA loans reduce the risk for the lending bank, making it easier for businesses to obtain approval and funds.

Alternative lenders, such as peer-to-peer, private investors, and direct lenders, offer additional channels for businesses to obtain funding beyond the banks. Alternative lenders are not subject to as much regulation on what they lend as traditional banks, so they are more flexible, have less borrowing criteria, and have much higher approval rates.

How Do I Get a Small Business Loan

You’re going to have to provide ALLOT of documentation. You will fill out an application, and then provide the requested information for underwriting. Below is a list of the most-commonly requested information:

  • Personal Information
  • Personal Background
  • Business Plan
  • Credit Report
  • Income Tax Returns and/or Financial Statements
  • Bank Statements
  •  Loan Application History
  • Collateral
  • Purpose for the funds (what will it be used for?)
  • Debt Schedule
  • Business legal documents, such as Business licenses and registrations, leases, formation documents (such as articles of incorporation or LLC filing), copies of contracts you have with any third parties, franchise agreements, and so on.

Once you receive loan terms from lenders, you need to determine which option best fits your business needs. Businesses typically analyze each lender’s eligibility requirements, loan options, costs and reputation. In the end, you want a lender that is most likely to approve your loan, offer terms and costs that fit your budget and cash flow needs, and offer good service during approval, closing and repayment.