Due Diligence – What is involved, and do I need it?
In due diligence a business undergoes a thorough examination of all its financial affairs and contracts before sale. Its purpose is to find any issues, problems, or liabilities that may not be obviously apparent. The buyer must analyse the material gathered and make further requests for more information if needed.
The firms undertaking this work must be experienced and insured for professional negligence. It is a false economy to skimp on due diligence.
The seller may be irritated by having to reply to large numbers of queries and demands for papers, which can be a problem if it is not sensitively handled
To make the process easier sellers should try to predict what information they will need in advance. This will usually include corporate papers and records (e.g., accounting reports, competitor and market comparisons, and analysis of intellectual property rights).
The level of due diligence is determined by the size and type of the transaction, any potential hazards, and the requirements of the parties. The four prime areas of interest are usually as set out below.
Financial
This will include all financial records of the business and any subsidiaries, together with any management information, budgets, forecasts, and plans.
Commercial
This will include details of any key clients, contracts, employees, competitor analysis, industry standards compliance, and general information on the target’s products and services).
Operational
This will include all of the company’s processes, as well as its location, stocks, suppliers, management structure, personnel numbers and capabilities.
Legal
Any legal risks are identified (e.g., ownership of property, equipment or vehicles, employment disputes, ongoing litigation, etc.