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Due Diligence Checklist

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You negotiated the deal and your financing is lined-up. Now, all that is left is the due diligence.

Let’s get started. 

Due diligence can be divided into two areas: financial and management. As the buyer, you will ultimately make the final decision, and to do so, you will need to set some firm guidelines. Identifying the reasons a deal will not work before starting due diligence is critical as is eliminating the hangover of emotional or irrational logic.

First, make sure you have a professional to perform the financial due diligence. Your CPA can usually handle this for you. You will need to head up the management area of due diligence and don’t be afraid to get some professional help to assist you.

Second, clearly identify the critical issues for this deal to work along with the deal breakers. Some of the key management areas you will want to examine are:

 1. What additional value will be created by this acquisition?

    Look for acquisitions where 2 plus 2 will equal 5.

 2. Identify cost reductions.

    Look beyond the personnel and at the areas of operation and economies of scale.

 3.  What are the growth opportunities?

     Typically, you will need to make it grow to pay for the acquisition.

4.  What is not on the financial statements?

     Some areas may be under-reported or missing.

 5.  Will the people accept change?

     How well will the employees adapt to the merger of the companies?

 6.  What are the revenue drivers?

     Is the revenue coming from products at the end of their life cycle?

 7.  What is the management style?

     Command and control managers are a red flag.

 8.  What issues are inhibiting sales?

     Are they personnel, money, always done it that way, et cetera.

 9.  What are the financial requirements?

     Identify the numbers you will require to make this work for you.

Your CPA will have an extensive list of areas to check on the financial side.  But you will need to get directly involved in the management issues.

- Steve Sink


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