After signing the Heads of Terms, you should make a thorough examination of the business. This is the second stage of due diligence. To undertake this successfully the following is wise.
Seek out customers. Ask them how long they have been customers, who is their main contact at the business and if this was the owner, consider his continued involvement and what will happen without him. Ask existing customers what is good and bad about the business. Ask existing customers if they use competitors and what is their advantage. Assess and ask what the future demand will be.
Tactfully ask suppliers for their views. For instance, does the business pay on time, is it efficiently run to their mind and how does it compare with competitors.
Analyse historical information and trends such as sales growth, profit margins, overheads and working capital. Look at debtors, creditors, stock and work-in-progress. Assess the scope for improvement and check for inconsistencies.
Has the business recently changed its accounting policy? If so it is worth considering whether the business may have changed its policy to increase the book value of stock and therefore inflate profits. To help assess this, compare the business’ financial projections with other evidence you have, do they tally with historical trends. For example, are the bad debt provisions realistic and is the debtor period standard?
In light of the current order book deliberate whether sales forecast are achievable. Tally this up with research undertaken such as that listed above. Does it tally with what you have found out. Does it tally with the general knowledge you have. Does it tally with the outlook for the industry and the economy as a whole?