The due diligence process involves the acquirer’s financial team, the legal team, and may also include other experts used to review additional areas of the target acquisition. Since this process includes a thorough examination of the details of the business, it is important that prospective sellers become aware of any “skeletons in the closet” due diligence may uncover. While some questions follow that may help identify the skeletons lurking within, a business intermediary professional is an excellent person to help a seller become aware of other potential issues and how to deal with them.

Management

• Is the owner/president/CEO constantly interrupted by telephone calls, emails or other diversions that require immediate attention? These interruptions may indicate a business in crisis or a general failure of management to control the business.
• Do employees seem to take pride in what they do and also in their company? Are they happy?
• Does the business experience a lot of turnover in either management or at the general employee level?

Marketing

• Is the company experiencing loss of market share, especially when compared to competitors?
• Price increases may increase dollar sales, but the important measure is unit sales.
• Is the company introducing new or improved products or services? A firm’s ability to do this is a critical part of the operation, affecting its success and potential for growth.
• Does the company participate in trade shows? Is the interest level high, or is the activity over at a competitor’s booth?
• Does the company have an excellent Web site and is it technologically above the competition?

Finance

• Does the firm produce monthly financial statements? Are the annual financials produced on a timely basis?
• Does the company take advantage of trade discounts, or is it late on paying its bills? These practices could be a sign that the company has poor cash-management policies.
• Are the margins and benchmarks better than industry standards?
• Has the company used up its entire credit lines and, if so, how (and why) have they been used? Is the firm on any kind of credit watch?

General Business

• Is the firm in a stagnant or even dying market, and can it shift gears quickly enough to make changes or enter new markets?
• Does the company have too many suppliers – or not enough? Is the inventory turnover better or worse than the competition or industry standards?

These are just a few of the business areas that an astute acquirer would investigate, but these areas may be outside the scope of the general due diligence procedures.

The due diligence on the financials and the legal aspects are obviously very important, but the answers to the above questions may ultimately determine whether the offered price is held firm or even if the sale is finalized.

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Every company has weaknesses; the trick is to fix them. There is a saying that the test of a good company president or CEO is what happens to the company when he or she leaves. Some companies on paper may look the same, but one may be much more valuable, due to weaknesses in the other.

Not all problems or weaknesses can be resolved or fixed, but most can be improved. Fixing or improving company weaknesses can not only significantly improve the value, but also increase the chances of finding the right buyer.
Here are some common weaknesses that could cause concern for acquirers and lead them to look elsewhere for an acquisition.

“The One-Man Band”
Many small companies were founded by the current president who has made all of the major decisions. He has not developed a succession plan and has no one in place to take over if he gets hit by the proverbial truck. He is the typical one-man band and, as a result, the company is not an attractive target for acquisition.

Declining Industry
Companies in a declining industry have to be smart enough to see it and make changes. One successful example was a company that made ties; somebody within the company was smart enough to see the decline in this apparel item and switched their business to making personalized polo shirts. A company can still make ties but has to have the foresight – and ability – to move into new product(s) as well.

Customer Concentration
This area is a major concern to most buyers. It is not unusual for the one-man band to focus on what made the company successful – one or two major customers. The relationships with these customers have been built over many years and are seldom transferable. Finding new customers may take time and money, but it is absolutely necessary if the owner wants to sell.

The One Product
Many one-man band run companies were based, and still are, on the manufacture and sale of one product; or the creation and development of a single service. Henry Ford made a wonderful car – the Model A – but that’s all he made. General Motors decided that many people would like something different and were willing to pay for it. Fortunately, for Ford, he caught on quickly, but Ford almost went out of business with the thinking that one model fit everyone.

Aging Workforce/Decaying Culture
Young people are not entering the trades, leaving many jobs such as tool and die positions filled with “old hands” who will soon be retiring. Technology may be able to replace these workers, but that decision has to be made and implemented. No one wants a business that will have idle machines with no one trained to operate them.

There are many other areas that could be considered company weaknesses. If there is a Board of Directors or an Advisory Board, perhaps they can help the one-man band create a succession plan and, just as importantly, a successor. Certainly, the time to do all of this is before the decision to sell is made. Whether current ownership plans on staying the course, or eventually selling the company, the good news is that resolving company weaknesses is a win-win situation.

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