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Whether you are acquiring a company as a way to enter a new market or expand your existing food and beverage business’ product offerings, proper due diligence is essential for evaluating the target company’s state.
A well-executed due diligence process can minimize the time and cost invested in the acquisition process, secure the best deal or purchase price and enhance your return on investment.
Here are five things to consider when evaluating an acquisition target for your food and beverage company.
A strong management team is critical for any business to remain sustainable. If the current owner has been actively involved in the business but will be leaving after you purchase the company, you’ll need to ensure that a capable management team will still be in place to oversee operations and retain customers and vendors.
Even if you plan on replacing the management team with your own team, you will still need to work with the company’s management team during the transition. When assessing the potential aquisition, make sure you talk to members of the management and sales team about top customers, relationships with key distributors and who has relationships with each.
The value of a business is based on its ability to be profitable in the future. Historical earnings are a good indicator, but dig deeper to understand whether the historical earnings are sustainable by looking at trends in sales, gross margins and expenses. This is particularly important if the target company produces food or beverage products aimed at customers with fickle tastes or products in very niche markets.
It’s also important to look at the impact of one-time transactions or projects that can’t be sustained. For example, the business may show a significant increase in profitability in the current year compared to the prior year. At first glance that’s good news, but it may have been driven by a transaction that can’t be replicated. Conversely, a decline in expenses might be positive or it may signal a cutback on maintenance and repairs because the owner is selling.
When buying a business, a detailed analysis of tax records is important because you will inherit any potential tax liabilities associated with the company. When reviewing the business’ filings, look for filings that were not made, overly aggressive or done incorrectly.
For example, if the company does business in the U.S., it may be required to file tax returns with the IRS. If the IRS contacts you six months after you purchase the company because the company owes taxes plus interest and penalties, then you’ll be responsible for the amounts owing.
Understanding how quickly current assets will convert to cash and the time it’ll take to settle current liabilities will help you evaluate cash flow needs and determine if any additional working capital is required after you purchase the company.
If you plan to finance a portion of the purchase price, the financier will look at the balance sheet to secure the loan. A due diligence report will allow these stakeholders to gain clarity on the business and the underlying value of its securable assets.
In addition to reviewing the assets and liabilities on the balance sheet, you also need to analyze off-balance sheet items such as major contracts, obligations or contingencies the company is bound by in the future (i.e., rent, distributors, suppliers, lawsuits, etc.) This will help you assess future obligations and their impact on the business.
Part of assessing the fair market value of the food and beverage business you’re acquiring is looking at recent prices for similar companies sold in the marketplace. If purchase prices of these companies are challenging to compare because the size of the businesses is different from yours, you can compare the price as a multiplier of other metrics, such as earnings or free cash flow, instead.
Buying another company can be a strategic way to extend your brand and grow the profits of your food and beverage business. The best way to approach an acquisition is to avoid rushing into a transaction. A proper due diligence process can save money, time and prevent disastrous acquisitions.
Related Topics:Transactions; Due Diligence
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