Buying A Business Due Diligence

Article by: Elizabeth
Last updated: Tuesday, 11-Jul-2006 00:00:00 CEST

Acquisition due diligence assesses the risks and opportunities of a proposed investment or purchase of a business. It helps to reduce the risk of post-transaction unpleasant surprises.

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It’s vital that the results of any due diligence process are relevant to the transaction including:

valuation of the target and therefore the purchase price

sale and purchase agreement (e.g. accounting definitions, accounting and tax warranties and indemnities, etc)

There are a range of circumstances in which companies can benefit from externally provided acquisition due diligence.

Where any organisation is considering an acquisition, merger or joint venture.

Where the organisation or deal manager has limited experience in undertaking due diligence.

Where existing advisers face a conflict of interest, or are not well placed to undertake the necessary due diligence.

Where the required due diligence demands technical capabilities and commercial experience beyond the organisation’s internal resources.

In lay terms, due diligence is the responsibility you have to investigate and identify issues, and due care is doing something about the findings from due diligence.

It is the process through which a potential acquirer evaluates a target business for acquisition.It refers to the research and analysis that takes place in advance of an investment, takeover or business partnership. The potential investor/purchaser generally uses in-house resources or hires a consulting firm that specialises in due diligence to investigate the target company.

A due diligence assignment can also includes checking for regulatory and licensing problems.

The investigative results are usually provided in a "due diligence report" that the investor uses to understand risks involved in the investment. For example, if negative information is uncovered then the prospective purchaser can decide whether to proceed, further investigate with the vendor(s), renegotiate or walk away from the deal.

In carryout due diligence you are looking to gain proof and find out whether the information divulged to you by the vendor(s) of the business, is true. It is a very important stage of the business buying process and you should not cut corners.

Dependant upon your own skills and the size and complexity of the business, you need to consider whether to employ a firm of accountants to carry this work out for you.

The benefits of engaging an accountancy firm are that they will carry the work out dispassionately, they are usually experienced in due diligence, they should be covered by professional indemnity insurance and you receive a written report from them fully documenting the evidence that they have obtained.

You are looking for comfort within the report and any issues of concern can then be taken back to the vendors for clarification. There is a cost associated with this work and you will need to evaluate and balance the possibility of things going wrong at a later stage against that cost.

It is possible for you to carry out some of the work yourself and some by a firm of accountants. That way you can increase your knowledge of the business and its operations. This work could include a list of creditors and where supplies are purchased.