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.

Buying a business for MSPs. Chapter 8, Due Diligence, Part A.

Ideally, you’ll review a number of businesses for practice, if nothing else. Learn how to read financial statements, even though you’ll use a specialist accountant, to review the financial statements and identify potential problems. As an aside, let your professional advisors find challenges, not negotiate. If you can, pay them fixed fees and not by the hour. If possible, pay them a fee contingent on the deal going through successfully. Explain that even if this one doesn’t go through, they can earn more from a future deal you’ll instruct them for. Feel free to ask the business owner to identify existing and potential problems. You may hear things you wouldn’t have thought of.

This is where you’re looking under the bonnet rather than just kicking the tyres. You’ll have already walked around the premises to get a feel for how the business is run. Now it’s time to delve deeper. It’s important not to skimp here or feel pressured. The process will take time, unless you abort partway through, so ensure you agree a window of no less than a month, more if necessary. When you agree your timeframe, make sure the vendor knows that the clock doesn’t start ticking until you are in receipt of all the information and documentation. Make sure you’ve got the right experts lined up to help you, legal and financial at the bare minimum, together with any brokers or other independent experts. Whilst you want to verify everything that you’ve been told, it will help considerably when the vendor doesn’t feel like you don’t trust them.

So trust, but verify. Again, it’s why the earlier time spent developing rapport was so important. Further to rapport, diplomacy and tact are now called for. Remember the point about inoculating the vendor. There will almost certainly be some issues that the due diligence process throws up. Because, as well as essentially verifying the facts, you’re also looking for problems, and this very process can cause problems in and of itself. Consider your legal people for a moment. Putting aside the cynical view that their primary motivation is to make money for themselves, their primary purpose is not to facilitate a deal, but to protect their client, and by extension, protect themselves from being sued for negligence.

Even with the best of intentions, things can and do go wrong in business dealings. And the only certain way that they can guarantee to protect their client in any deal is if the deal does not go through in the first place. Of course, if lawyers were used at the moment of marriage proposal, nobody would ever get married, and consequently, nobody would ever go through divorce. It’s a horrid outlook and impractical in reality, although as a metaphor, it can serve to remind us that our legal representatives, whilst trying to protect us, can stifle a deal.

So judgment is needed as well as aforementioned diplomacy. Your accountant is in a similar position. They have the unenviable task of trying to evaluate and untangle the bewildering away of financial representations within an unfamiliar business, which has likely had its accounts prepared in such a way as to pay as little tax as possible. Businesses are, typically, managed to minimise tax liabilities and not show cash flow, and it may be advantageous for both sets of accounts to have full dialogue with each other. Again, like solicitors, The primary job of the purchaser’s accountant is to protect their client above all else, even at the expense of killing deals if necessary. Depending on the size of the business you’re looking to acquire, the prepared accounts may be unverified, i.e. not externally audited. Be sure to answer the fundamental question, how much will this business pay me? By establishing what the current business owners take out of the business, include profits, wages, expenses, benefits in kind, etc. From all the copious notes you’ve made so far during your discussions, look for anything that struck you as odd at the time or that needed further investigational validation.

Everything you’ve written down as a statement is not valid until checked. To help organise yourself and work forwards to a plan along a timeline, it might help to break the process down into six main business departments, such as legal, which covers company structure, shareholders, contracts, agreements, leases, and insurance. Financial, which covers bookkeeping, financial accounts, management accounts, et cetera. Sales and marketing. Production, i.e. operations, equipment, stock, storage. The systems and processes, admin, IT, software, disaster recovery, facilities management. And the people, the customers, the staff, the suppliers, R&D, training and development, health and safety, et cetera. We’ll now go through each of those separately in detail. Legal. Establish the ownership structure, including shares, paying attention to any changes in ownership. Ensure the company actually owns its assets. You do its website, its IP, the patents, licenses, trademarks, marketing, domain, imagery, copyright, and other collateral, its stock, land, and property, equipment, cash, receivables, and leases, and so on.

Check any leases and ensure they can be transferred. You may need to prove worthiness to the owner of the lease. Ditto for licenses and insurances. Establish there are no pending lawsuits. Have there ever been any significant insurance premium charges? Review contracts existing and pending with clients, staff, and suppliers. The common covenants include non-disclosure, non-compete, and non-poaching agreements. For you, the vendor and their staff and agents, et cetera, a force majeure clause can protect you from your liabilities in the event of an unexpected event, for example, flood or terrorism.

And business as usual, you might require the seller to agree to work or consult with the business for a set period to show you the ropes and help with handover and promise to maintain existing procedures, whilst not making any new and unusual agreements with staff, suppliers or clients. Do note that very often the owner will not stay the full term and this is usually by mutual consent at that stage. After a while they typically don’t want to be around and you don’t want them to be around either.

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.