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Buying a business for MSPs. Chapter 8. Due diligence, Part B.

Financial. Is there a business plan to review? Are there written records for the accounts and bookkeeping processes? Are the accounting methods consistent or have they been changed? Has the company been sold before or attempted to be sold before? Do any of their directors or key employees have convictions? Has an auditor, accountant, company secretary, or other directors resigned or moved recently? Review all the bank statements, cheque books, and highlight any anomalies. Review the trend of revenues, cost, and profit. Normalise and remove one-off or unusual income and expenses to ascertain trends. Review the last year’s tax returns. Verify accounts payable and receivable, and check debtor days and probable amount of bad debt. Verify or create a cash flow statement for the next six months.

Management accounts. While bank accounts tell the truth, management accounts paint a broader picture and are more subject to interpretation, but nonetheless still worth reviewing. Check lines of credit and any undue amounts owed. Establish any contingent liabilities. Have the loans been serviced properly? Are there any bad credit issues? Has the tax office ever had to issue warnings? Onto sales and marketing. Review trade publications for an industry overview. Is there a marketing plan in place? What marketing activity is happening and what are the results? Is there a proper sales function or is it just haphazard? Become a mystery shopper of a salesperson, not the business owner, and pump them for information. See how they operate and identify strengths and weaknesses in their delivery. From some elementary research you can conduct about the importance of working to a marketing plan, you should now be clear about the main marketing KPIs, so there’s no point repeating that here. Many businesses won’t have this information to hand because they’re simply not run well, which could be an opportunity for you, although it will hamper your investigations. In our experience, if a company has a sales department, it’s often simply one person who’s the default salesperson. One person is not an ideal number because it doesn’t create any competition and it’s difficult to gauge the output of a single individual. It can be the sign of 6 sales, but it can be improved and could therefore represent a potential opportunity.

Production. Are there written records for the production process? What is the quality control and feedback process? See if any capital equipment has to be replaced, as this could be expensive, and check the leases. Get a manifest of stock and understand how it’s been valued and consider its obsolescence. Check for loans against assets. And what are the main contracts in place for software and equipment? What is the supply chain? What key materials or resource is required? What are the handling and disposal requirements for unused, unwanted, spent, discarded materials and wastage? Systems and processes. Are there written records for the systems and processes? For example, admin, how are the bills paid? How are payments made? What is the state of the building and situation with rents, leases and expiry dates? What software is in place? Is it custom or off the shelf and who maintains it? What security and backup systems are in place? Where is data stored and who has access? Who has keys for the building? What is the process in the event of a disaster, fire or flood, or hack, for example? Review the risk management policy and business continuity plan. What’s the accident rate? Is there a proper health and safety policy? And what certifications, licenses, and regulatory bodies are required and maintained?

And onto the people. What other activities and businesses are the owners involved in? Have they ever been bankrupt and what is their credit rating? Are there any conflicts of interest for the directors, managers, staff or suppliers? Is there an organisational chart? Who are the key people and how difficult would it be to replace them if they left? Check employment terms such as salary, overtime, bonuses, profit sharing, pay rises, holidays, sickness, pensions, redundancy, determination and so on. What are the recruitment policies? Is there a written code of conduct? Have CVs actually been checked? Are there any known issues such as health, financial, litigation, personal issues? And what’s the rate of staff turnover? How are professional qualifications required and maintained? How are memberships, professional bodies, certifications required and maintained? Which staff have proved problematic or had disciplinaries? What’s the morale of the staff? Do they get along? Are there any instances of harassment, bullying, discrimination or other antisocial issues? Are any staff capable of taking key contracts to a competitor or setting up for themselves? Who are the key customers? Do any represent a significant threat if they go elsewhere? What are the terms of their contracts? What’s the breakdown of customers versus margin? How long have key customers been in place and how were they acquired?

Get a short list of clients lost and the reasons over the last couple of years. Do any clients need undue time, servicing or unprofitable due to other issues? How profitable are any clients who appear to be unhappy? Are any major contracts due for renewal? Is there a history of complaints from any customers? And who are the key suppliers? Do any suppliers have any undue influence? Are any of the major supplier contracts about to expire or be renegotiated? You can see from these examples, which are numerous but by no means exhaustive, that you’ll need to ask around. Ask people other than the business owner. Speak to staff. Establish, without causing any concerns, what they think of the company. What do the clients think of it? And what do the suppliers think of it? It cannot be overstated that your legal and financial people need to go through their various processes before you proceed any further.

MSP Marketing in bite-sized bits. It’s easier than you think with MKLINK. To get more of MKLINK’s MSP MBA Marketing and IT training resources, make sure that you’ve registered for your account for free now at www..MKLINK.org.