Before completing a deal, buyers may conduct a variety of different research on a seller’s business to better understand its complexities of it prior to due diligence. This research is an important step to ensuring that due diligence is carried out. Business research occurs in a variety of different ways.
Confidential Information Memorandum (CIM): Potential buyers will look to CIMs as the first point of information. The document, which is normally provided after an NDA is executed, provides oversight into a number of different items ranging from brief financial overviews to customer information.
Financial Research: This review is carried out through sellers providing a number of different items. Buyers will look to review the business’ income statement, balance sheet, monthly financials, and tax returns, among other financial documents. They conduct this research to view how the business is competing financially as well as attempt to discover anomalies within its finances.
Customer Research: Buyers may also wish to conduct research on a business’ customers. This, in part, is done to determine its customer concentration. In general, a higher concentration creates more risk for buyers, so this is an important part of the research process. Acquirers will also look to the business’ target markets to better understand potential opportunities for future expansion.
Suppliers & Vendors: Buyers will look to conduct research on a business' suppliers to gain an understanding of its relationships, contractual obligations, vendor concentration, and alternative options should a buyer wish to eventually change suppliers.
Employee and Organizational Structure: Employees are the heart of a business; therefore, a buyer will look to better understand the number of employees and amount of key management personnel. Potential buyers will look to the organizational structure and chart to better understand how the business operates.
Offered Products & Services: As with all deals, the business’ offered products and/or services are crucial. Buyers will attempt to gauge how these offerings fit into their own business model or goals, in an individual’s case.
Real Estate: Research regarding the business’ real estate and/or lease is a normal occurrence when considering purchasing a business. Buyers will likely request the business’ lease agreement to gain knowledge of the length and monthly rent.
Financial Projections: While financial projections are not required by all buyers, some may wish to see how ownership projects grow in the future. This could be a key component in a deal structure pending owner earnouts and notes.
IT Infrastructure & Technology: While some businesses may have less IT infrastructure and technology than others, these can be crucial for businesses in specific industries. Heavily technology-dependent industries, such as logistics, software, and medical, must have up-to-date technologies and infrastructure, which makes this background research important for potential buyers.
Patents & Trademarks: Certain industries maintain patents and trademarks, which buyers will research. As these will be required to transfer to new ownership, should they be expected to stay with the business, buyers will look to research what each patent and trademark entails.
Why is research conducted?
Determining Fit: With all deals, a fit between buyer and seller or buyer and business is imperative. Several of the topics researched are to determine a buyer’s fit within the business. Acquirers hope to ensure they will transition into the business smoothly, and this research is completed to project as much as possible.
Business Understanding: Multiple items are researched, which enables buyers to understand the business operations and processes better. This is imperative as drastic changes to operations may cause a difficult transition to new ownership and employees.
Legal Standing: Buyers research to determine if a business is in good legal standing. Before a transaction can take place, buyers will look to ensure the company they are purchasing is of good legal standing.
To accelerate due diligence: In large part, background research is conducted to accelerate the due diligence process. As due diligence includes a comprehensive review of the business, buyers will look to receive documents and information prior to a letter of intent being signed to decrease certain documents and data required for the process.
Buyer research is a critical portion of the mergers and acquisitions process as it can save both buyers and sellers time throughout due diligence.
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Benchmark International’s global offices provide business owners in the middle market and lower middle market with creative, value-maximizing solutions for growing and exiting their businesses. To date, Benchmark International has handled engagements in excess of $8.25B across various industries worldwide. With decades of global M&A experience, Benchmark International’s deal teams, working from 14 offices across the world, have assisted thousands of owners with achieving their personal objectives and ensuring the continued growth of their businesses.