Pros and cons of starting a subsidiary business

Due diligence is crucial when making major business investments, such as buying a business or merging with another company.

It allows you to gather information and make an informed decision before acquiring a company.

Buying another company can be a fast track to business growth.

It's a quick way to acquire access to new products, markets, customers, and staff that may have the skills and knowledge you need to develop your products or services.

Buying a business is a big decision.

It can be risky, too, if you don't take the time to learn about the business you're interested in through due diligence.

Doing your homework on the company is essential to avoid making a mistake that could cost you time and money.

What is due diligence?

Due diligence is a comprehensive appraisal of a business that you should take as a prospective buyer, whether you are planning to buy the company outright, buy shares within it or invest in it.

A detailed fact-gathering process, due diligence establishes a business's assets and liabilities and evaluates its commercial potential and current value.

The time it takes to complete due diligence can depend on the size and complexity of the business you are looking to buy.

Why is due diligence important?

Due diligence is important as it allows you to learn about the financial health, operations, and potential issues such as outstanding legal claims against the business you are looking to buy.

Once you purchase a business, you'll become responsible for any problems, including debt and legal claims.

Reviewing basic information is usually not sufficient when investing in a new business.

The detail required and assessed through a robust due diligence process can help provide the depth of knowledge needed to make an informed decision.

It can help identify potential problems and ensure you are paying a fair price.

The process may identify issues within the business you were unaware of that could make you reconsider the company's value.

These could include:

• the company being culturally and operationally the wrong fit for your business
• outstanding debts and legal claims
• outstanding tax bills
• other investors and shareholders
• issues surrounding employees or company pensions
• assumptions about growth and the market that are incorrect.

Who can help do a due diligence report?

Creating due diligence on a company can be a complex task.

You may need external support to cover all aspects of reviewing a business, such as its financial position.

Support you may want to consider includes:

• your business leadership team, involving expertise such as marketing, finance, and IT
• the leadership team of the company you are researching to provide insights into the business
• your accountant to advise on the financial health of the business, such as its balance sheet
• your solicitor to advise on legal issues, such as contracts with existing customers.

Your due diligence checklist

Key areas should be considered as part of your due diligence process to get an in-depth look at the business and make sure it is a wise investment for you to make.

A due diligence checklist can show what you need to investigate in each area.

Finances

This element of due diligence examines financial aspects of the business and can include trading data, balance sheet, and the financial forecast for the company.

Things to consider include but is not limited to:

• company accounts and statements highlighting cash flow, including profit and loss
• information on share values, any shareholders, and what percentages they own
• annual reports
• expenses, debt, collateral, and equity
• payroll
• VAT statements
• tax liabilities
• depreciation and amortisation processes
• projections for future financial performance.

Legal

This element investigates the corporate and legal structure of the business and can include areas such as:

• supplier and customer contracts
• tax returns and property
• insurance policies, including any claims made
• permits and licences
• regulatory compliance
• any litigation issues
• health and safety.

Discover why compliance is important for smaller businesses.

Operational structure

The third area of due diligence can examine the business's strengths and weaknesses, including people, supply chain, processes, logistics, sales, marketing, IT, and systems.

It can review existing systems and plans for future changes.

Things to consider may include:

• sales processes, manufacturing, and distribution
• products and services
• business partner contracts, suppliers or other third parties and shareholders
• culture, and values
• product trials, warranties, and complaints
• quotes, pricing, invoices, and profit margins
• IT equipment and software, including its age and efficiency.

Business assets

This aspect of due diligence can include identifying and assessing company assets such as:

• property and equipment owned
• fixed and variable assets
• intellectual property rights, such as trade secrets and trademarks.

Discover how smaller business can protect their intellectual property rights.

Employees

It can be essential to examine employee data, such as the number of staff on payroll, through to company culture, such as how employees feel and work within an organisation.

Areas to assess can include:

• employee contracts
• organisational charts and corporate structure
• job roles and salaries for current employees
• partners, consultants, or freelancers, including legal and finance professionals
• various leave policies for employees and the staff handbook
• material employee benefits, such as stock investment
• professional experience of senior board members
• processes for onboarding and offboarding
• benefits, including pension plans
• social and cultural approaches, such as team activities and leadership culture
• previous staff surveys
• staff churn, such as average employment length
• annual review processes
• complaints or compensation claims from employees.

Looking to hire staff? Discover the benefits of hiring for diversity and inclusivity.

Marketing

It’s also work paying attention to how a business markets itself and its products when weighing up the decision to purchase.

Due diligence in this area can examine anything from marketing activities and outcomes, such as advertising campaigns, to broader marketing data, such as brand perception and customer satisfaction.

Areas to consider can include:

• marketing budgets
• the success of marketing campaigns
• KPIs and measurements used to evaluate performance
• customer perception, such as brand recognition
• published press releases and articles.

Completing due diligence is vital for anyone considering purchasing a business.

It allows you to get a complete picture of the business and what you would be getting yourself into before making a decision.

This can help you avoid potential pitfalls and ensure that purchasing the business is the right option for you.