Following our article in April, Pre-sale preparation for selling a business, let's now consider things from a buyer's perspective. If you have found a suitable business to buy and had a positive initial meeting with the seller, it's now time to conduct due diligence.
This is a crucial step in purchasing a business that many buyers often overlook or fail to do properly, which can lead to unexpected issues later.
It's important to remember that conducting proper due diligence is about ensuring you have a complete understanding of the business before completing the deal. This will protect both parties from any disappointment or financial loss. The age-old caveat ‘Buyer beware’ still applies.
To make sure that you conduct effective due diligence, you need to consider just some of the following aspects:
- Verify that all clients have undergone anti-money laundering checks etc.
- Assess the payment history of clients, identifying any chronic late payers or clients with extended credit terms. Will they fit into your current model?
- Review the Gross Recurring Fees (GRF) figures provided by the seller for the past few years, excluding one-time fees, and drill down to see the breakdown and split across the clients. Is the business growing or in decline? What do the margins look like? Are they maxed out or is there room to improve? This will affect the price you want to pay.
- Examine a large sample of clients, especially those with significant fees, and confirm their current status with the seller. Are they still trading and is the relationship strong?
- Gauge the quality of work and client relationships, addressing any concerns with the seller regarding any unfinished work in progress (WIP) for certain clients.
- Carefully review the contracts of employment, understanding the current level of skills, qualifications, and experience of the staff or partners employed in the business. Will their terms and conditions match those of your existing staff? It is worth engaging with an HR consultant to check things over and to assist with their transfer (TUPE) to the new employer if you don’t already have someone in-house.
- Ensure that key members of staff are aware of the potential sale and are supportive and on board.
- Study the management accounts and records, sharing them with another professional for an opinion if needed.
- Check that all regulatory requirements have been met and verify if there have been any professional indemnity claims in the past or currently.
- Assess how the practice's operations can align with your current methods, including the integration of clients smoothly. Are the clients using online systems, is there still a lot of paper?
If all the due diligence checks are looking positive, it is also advisable for both parties to take legal advice from a solicitor who specialises in business transfer and acquisitions before you get to the heads of terms. This will ultimately save you time, and you can avoid additional costs correcting mistakes further down the line.
Conducting proper due diligence may require professional help and take time, but its seldom time wasted. Ultimately, it will save you time and help ensure the sale completes smoothly without any last-minute hiccups, disputes, or costly mistakes.
Simon Read, Accountants for Sale
