In the wide, wide world of mergers and acquisitions (M&A), most business buyers conduct thorough due diligence before closing their deals. This usually involves carefully investigating the target company’s financial, legal, and operational positions.
As a business owner, you can perform these same types of reviews of your own company to discover critical insights.
Now you can take a deep dive into your financial or legal standing if you think something is amiss. But assuming all’s well, the start of a new year is a good time to perform an operational review.
Why Perform an Operation Review?
An operational review is essentially a reality check into whether – from the standpoint of day-to-day operations – your company is running smoothly and fully capable of accomplishing its strategic objectives.
For example, a real estate business relies on recurring revenue from established clients as well as new revenues, in order to survive and grow. It needs to continuously ensure that it has the knowledge, talent and resources to acquire, buy or lease properties to develop or resell. The point is, you don’t want to fall behind the times, which can happen all too easily in today’s environment of disruptors and rapid market changes.
Before getting into specifics, gather your leadership team and ask yourselves some big-picture questions:
- Is your company falling short of its financial goals?
An operational review can spotlight both lapses and opportunities for increased profit and can offer recommendations to improve management performance.
- Are day-to-day operations working efficiently?
Implementing system controls like automated financial tracking systems and data analytic tools can help real estate companies streamline their operations and improve efficiency.
- Is your company organized optimally to safeguard its financial records and reports?
Protecting financial information is especially important in the real estate industry where most transactions involve large sums of money.
- Are your company’s assets sufficiently protected?
Implementing system controls to protect your business and its properties can prevent unauthorized access; making regular inspections will identify any issues or damage.
What to look at
When business buyers perform operational due diligence, they tend to evaluate at least 3 primary areas of a target company:
- Operations: Buyers will scrutinize a company’s structure and legal standing, contracts and agreements, sales and purchases, data privacy and security and more. Their goal is to spot performance gaps, identify cost-cutting opportunities and determine ways to improve the bottom line.
- Selling, general & administrative (SG&A): This is a financial term that summarizes a company’s sales-related and administrative expenses. An SG&A analysis is a way for business buyers — or you, the business owner — to assess whether the company’s operational expenses are too high or too low.
- Human resources (HR): Buyers typically review a target business’s organizational charts, staffing levels, compensation and benefits, and employee bonus or incentive plans. Their goal is to determine the reasonability and sustainability of each of these factors.
A Funny Question to Ask Yourself
Would you buy your real estate company if you didn’t already own it? It may seem like a funny question, but an operational review can tell you, objectively, just how efficiently and impressively your business is running. Roth&Co is happy to help you gather and analyze the pertinent information involved.
This material has been prepared for informational purposes only, and is not intended to provide or be relied upon for legal or tax advice. If you have any specific legal or tax questions regarding this content or related issues, please consult with your professional legal or tax advisor.
