Buyer And Seller - Be Ready For The DUE Diligence Process

Due diligence may frequently reveal additional facts that may impact value and, subsequently, the price a buyer is willing to pay. Here are some examples :- 

Key Personnel :-

 

It is not unusual for the owner to function as CEO, CFO and COO. An owner may be making $200,000 a year to serve in all three functions. A new owner will most likely have to have three people filling these spots. This management team will probably make in aggregate a lot more than the $200,000. The perks required by these three will also be substantially more than the previous management team of one. As a result, the cash flow of such a company would significantly decrease for the new owner. 

Supply Sources :-

 

If the company prides itself on its low cost of raw materials, how solid are its sources? What if their nuts and bolts come from one supplier, and this supplier is in China? A company using a special formula from one supplier is vulnerable to a change in supplier relations (an increase in price) or an interruption in supply due to who knows what. 

Short-Term Contracts :-

 

Reviewing the customer contracts may reveal that they are, for the most part, short term. If the contracts are with major customers, these customers may require extra service or even deeper discounts. It costs much less to keep one existing customer happy than it costs to obtain a new one. 

Product Diversity :-

 

Single-product companies are at a much greater risk due to competitive products and competitive pricing. Supply sources also create risk. 

Customer Concentration :-

 

This is included in all sorts of lists of concerns whether it's valuing, buying, or selling a business. However, it is a serious issue. Companies with just one or two major customers are at great risk. The loss of only one or two major customers could then impact the company's very survival. 

Third-Party Approval :-

 

Franchises may be a good business opportunity, but when it comes to selling, buying a franchise may present a real obstacle. The franchisor usually has the right to approve the Business Valuation Services Buyer and may impose other conditions such as an overhaul of the facility or a complete face-lift. Franchisors may also have the first right of refusal, which makes it more difficult to sell. Most buyers don't want to compete with a franchisor and the more difficult the franchisor, the more likely the buyer is to drop the deal. 

Other factors that may impact the valuation are : ESOP ownership - too many owners; inventory - too much or dated inventory can present a problem; and intangible assets - patents, copyrights, brand names, goodwill, etc. May have great value, but can be very difficult to quantify. 

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