Due diligence refers to the process of reviewing all of the available information related to that business. Due diligence means digging deeper with the goal to make sure that all financial, legal, and operational issues pertaining to the business are in order and that there are no unpleasant surprises should you decide to go through with the purchase. Due diligence is a process of verification wherebythe purchaser has a chance to verify everything that has been presented andconfirm that what he or she is getting is true and accurate depending on thesize of the transaction.
So Why is it so Important?
Well from a buyer side it’s important that the buyer feels comfortable that his or her expectations of the proposed transaction are correct. Purchasing a business without such due diligence would in most cases substantially increase the risk to the purchaser. From the sellers perspective, it’s important that you be aware of what the diligence with entails. Some surprises to buyers often collapse the transaction due to a sudden loss of trust a seller would be well-served by preparing for due diligence ahead of time. Due diligence and smaller transactions can take as little as a couple of weeks while on larger transactions it’s not uncommon for due diligence to take several months or longer in some transactions. Due diligence will carry on right through to the closing typical.
Major Sectors of Due Diligence
Due diligence is divided into three major sectors: operational, financial, and legal. An exhaustive due diligence list might contain hundreds of items but in this short time, space diligence process anon exhaustive sampling of a typical due diligence schedule would diligence with the following. I’ll try to break them up into three major sectors
Ask for the company’ audited financial statements request, balance sheets, income, and cash diligence process, as well as business tax returns for the past three to five years. Include future projections or budgets request, additional tax information, profession provincial and federal tax positions, warranties and other financial liabilities, anticipated expenditures with a capital or inventory swings and details on working capital. You and your accountant should review them with the following in mind they are and is the business collecting its accounts receivables and paying in a timely manner. How much bad debt does the company write-off each year? What is the profit margin?
Ask for copies of any professional and consulting agreements, insurance policies, licenses, and permits, and any documents related to intellectual property such as patents or trademarks and any documents related to pending litigation. You and your lawyer should review them with the following in mind are the agreements enforceable? Does the company have the rights to its intellectual property? Is the business adequately insured? Are the company’s licenses and permits current? Is the company involved in any litigation and if it’s so what are the potential risks, costs, and
Ask for info on customer or supplier concentration, market share technology, historical and project edgrowth rates, a list of machinery and equipment and an operations manual. Review this information while considering does the business have adequate inventory systems in place? Has the company’s supply chain diversified not overly reliant on any one supplier? Is the company’s customer base diversified and growing? Does the company have
Due diligence is a critical part of a sale or acquisition of a business; this is where deals often fall apart if not properly orchestrated and managed. At the end of the due diligence process you should have a clear picture of one of the businesses today, where you can take it in the future, why the owner is selling, and whether the asking price is fair. Using the services of a professional and knowledgeable business broker or intermediary will ensure you the vendor will pass the due diligence with flying colors while you the purchaser will feel much better about the investment you’ll be making knowing your due diligence was thorough.