A “Pig in a Poke"

Once a buyer and seller have a Purchase Agreement in place, the due diligence phase of the acquisition begins.  Some due diligence can be accomplished by analyzing hard numbers and facts.  Verifying inventory, sales, and receivables can be accomplished through closer examination of the company’s books and records.   Other factors, however, can require a bit more digging to insure there are no “skeletons in the closet.”  No buyer wants to end up with the proverbial “pig in a poke.”

The four main areas of concern are: business’ finances, management, and marketing.

Business’ Finances: The following areas should be investigated thoroughly. Does the firm have good cash management? Do they have solid banking relations? Are the financial statements current? Are they audited….. and if not, are there sufficient records in place to cross check financial statements against transaction registers?  Is the company profitable? How do expenses and sales compare to industry benchmarks?

Management: Nothing can take a profitable business out of the black faster than poor management and employee relations.   A business with key management personnel in place is critical.  Always find out who, among the management and staff, are related to the owner in some way.  For a good quick read on management, the buyer should observe if management is constantly interrupted by emergency telephone calls or requests for immediate decisions by subordinates? Is there a lot of change or turn-over in key positions?  Are the employees upbeat and positive?

Marketing: Price increases may increase dollar sales, but the real key is unit sales. How does the business stack up against the competition? Market share is important. Does the firm have new products being introduced on a regular basis.

By doing one’s homework and asking for the right information – and then verifying it, you won’t end up with a  “pig in the poke.”