Summarize:

Employee salaries make up a large fraction of a company’s costs. You should request information from the target about the following:  List of key employees. Total compensation paid to employees. Explanation of employee benefits. Benefits make up a large percentage of total compensation. Copies of employment contracts, if any. Check if the contract provides for severance packages if you lay off any employees. Pay history. Check to see how much the company has generally given in raises each year. The current employees will probably expect a comparable amount once you buy the target. You should calculate the company’s debt-to-equity ratio. This is the amount of debt divided by the amount of shareholder equity. If the company has a high debt load, you might not want to acquire it.  A healthy debt-to-equity ratio will depend on the industry, so research what is typical. For example, technology companies with a lot of research and development have ratios of 2 or lower. However, in the financial industry, ratios can be 10 or higher.  Also check the interest rates on the company’s loans. The company might have a moderate debt load but at a high interest rate. If you buy the company, you can refinance the debt for a lower rate and save money. This type of company is an attractive target. Some debt agreements contain a clause that accelerates debt repayment when a business is sold. Check all debt agreements for these clauses. Accounts payable are the amount the target company owes other businesses for buying goods or services on credit. For example, a company might owe its suppliers for two months of supplies. Check that the target pays its accounts payable in a timely fashion. If not, try to identify why. Is it experiencing a cash flow problem? A target company might have signed contracts for materials, supplies, or commercial space. Make sure you get a copy of each and fully understand the terms of the company’s obligations. Also consider whether you can negotiate a better deal with the third party. If so, then the target company might be an attractive option. It’s normal for large companies to be sued. However, your target shouldn’t have more lawsuits than is typical for a company of its size in its particular industry.  The company should disclose its pending or anticipated lawsuits. Also ask for information about any lawsuit within the past five years. If the suits settled, then ask to see copies of the settlement agreements.  You can find information about lawsuits by searching online. Also check with your state’s Attorney General’s office. Environmental costs can be much larger than you anticipated. Accordingly, you’ll want to perform an environmental review of the target business. Consider the following:  The company’s environmental permits and licenses. Any correspondence with regulatory environmental agencies. The hazardous substances the company uses in its daily operations, e.g., petroleum or asbestos. Environmental lawsuits or investigations. You’ll want to confirm that the target company is paying its taxes. Make sure to double check the calculations to confirm the company has paid the correct amount over the past few years.  Also look for suspicious business deductions. A business deduction should be ordinary and necessary for a business of its type.  Business deductions shouldn’t be too large for the business, either. For example, a mom-and-pop business shouldn’t be deducting jet travel expenses for meeting with suppliers one state away.
Request information on employees. Analyze the target company’s debt. Analyze the target’s accounts payable. Collect information on contractual obligations. Investigate whether the company is being sued. Identify any potential environmental issues. Review the company’s taxes.