Researching the Business Creditors, Equipment & Employees

Last Updated: August 22, 2009

5h) Creditors (the people that the business owes money to)

Discover the amount of money that the business owes and use the accounts (cash flow forecasts) to provide an answer to whether these can be paid back, more importantly, on time. Such debts may be bank loans, overdrafts, debentures and purchases made on credit (for example, with suppliers).

Has the business made payments on time with previous creditors? Investigate the credit history of the business to find out the reputation it has at making payments. It may be that it has gained a bad reputation, in which case the business will have difficulty obtaining loans and purchases on credit in the future.

For any outstanding debts owed by the business, review the terms and conditions including interest rates and credit periods. Are there any assets tied to these debts that are in jeopardy if payments aren’t made? Researching these issues will be included in your due diligence period. A report of the company’s trading figures may have some historic creditor figures.

5i) Equipment & Machinery

Although these would be included as fixed assets (if owned), they have separate issues of their own that need to be covered. Your main concern is if the machinery and equipment is capable of handling operations during times of maximum demand? If not, determine the maximum production levels of each asset so that you can provide an estimate of extra machinery and equipment that you may need to purchase (or lease/HP).

Look at their condition and find out if any repairs are necessary and how advanced the technology is. This will give you an idea of how often maintenance is required and its reliability. You should also price the assets with a view to depreciation. Use your accountant for asset valuation, but if you are buying a business and going it alone (DIY), simple accounting books are sufficient for your needs if you have the original invoice for the asset.

5j) Employees

When you buy a business, will you keep any of the employees that are employed by the business? It may be that a new owner will cause some employees to leave, in which case it is down to you to determine those faithful to the business. Use your due diligence period to analyze all employees to discover those that are key personnel to the business.

How skilled is the current workforce and is it sufficient to ensure the success of the business ? Investigate any contracts to find out the businesses commitment to rates of pay and benefits for each employee. If you decide that you would make redundancies or changes to the workforce, use your solicitor for advice BEFORE making any moves – Law is a vast minefield!