Done well, acquiring another business can be an effective way to grow, improve the value of your business over time, and help you meet your long-term goals as a business owner. That said it can be fraught with risk.
When considering an acquisition, there are several important initial questions you should ask to gain a comprehensive understanding of another company’s operations, assess the potential value of the acquisition, and determine whether an acquisition is the right move for your business.
At a high level, you will want to know the following about the business you are considering acquiring:
- What are the company’s strengths and weaknesses? This will help you to understand how the acquisition would complement your own business and where there may be potential synergies.
- What is the company’s financial performance? This will give you an idea of the value of the business and whether it is a good fit for your company's financial goals.
- What is the makeup of the company’s customer base? This will help you to understand how the acquisition would impact your own customer base and whether there would be any potential conflicts.
- What is the company’s culture? This will help you to assess whether the two companies would be a good fit culturally and whether there would be any challenges in integrating the two businesses.
- What are the company’s future plans? This will help you to understand their strategic goals and whether they align with your own.
- What are the potential terms of the acquisition? This will include the purchase price, payment terms, and any other conditions that would need to be met to complete the acquisition.
By asking the below - more specific - questions during an initial discovery period you can get a better and more thorough understanding of the value of another business, how well it fits with your own, and the risks associated with the acquisition.
Below is a list of more specific questions to help you in your discovery process.
- Financial and operational performance:
- What are the company's annual revenues and profit margins the past three years?
- Any seasonality or cyclical patterns?
- What is their current debt situation?
- Are there outstanding legal or financial liabilities?
- Are their financial statements audited? If yes, by whom?
- Customer base and contracts:
- What is the makeup of their customer base?
- Who are their major clients, what industries are they in?
- Are there significant customer concentration risks?
- Are there any long-term contracts or partnerships in place?
- Are there any exclusivity agreements with clients?
- What is the customer retention rate?
- Growth Opportunities and Challenges:
- Are there potential growth opportunities in the markets or geographies they serve?
- Are there any emerging markets or new services they haven't tapped into?
- What are the main challenges or risks they face?
- Are there pending regulatory changes that could impact their business?
- What sets their services apart from competitors?
- How do they attract and retain customers?
- What is their reputation in the industry?
- Operations, Tech, and Infrastructure:
- What is the scope of their operations, including the geographic areas they cover?
- How many vehicles, warehouses, distribution centers or other physical assets do they have?
- Are there any leases, property ownership, or maintenance contracts in place?
- Do they have any proprietary technology or software systems?
- What software, tools, or systems are they using for their operations?
- Are there any proprietary technologies or intellectual property?
- How efficient and scalable are their current systems?
- People
- How many employees currently work for the company?
- What is the skill and experience level of their workforce?
- What are the key roles and responsibilities of their leadership team?
- Will key employees be retained and integrated post-acquisition?
- What is the organizational structure and reporting lines?
- Are there any employment contracts or non-compete agreements? If so, when were they put in place?
- Due diligence and documentation:
- Can you review financial statements, tax records, and legal contracts?
- Can you access customer and supplier contracts for review?
- Are there any intellectual property rights or patents associated with their business?
- Integration and Synergies:
- How compatible are their systems, processes, and culture with yours?
- What synergies can be achieved by combining the two companies?
- What potential cost savings or operational efficiencies can you leverage?
- What overlapping or redundant operations will need to be addressed?
- Financial valuation:
- Has the company been recently valued?
- How was the company's valuation determined?
- What assets, liabilities, and financial metrics are considered in the valuation?
- Are there any unique or intangible assets that impact the valuation?
- Additional things to consider/ponder…
- How do you envision integrating the two companies?
- What are the long-term goals and vision for the company?
- Do you have any plans for expansion, diversification, or new services? How well does this new acquisition serve those plans?
- Does the current owner have an exit strategy in mind? Are they willing to seller finance or stay with an earn out tied to growth?
Additionally, consulting with your legal, financial, and industry experts during the due diligence process is highly recommended to protect your interests and everyone involved.