Due Diligence

A broad definition of due diligence is an investigation into the financial and commercial activities of a business in connection with a proposed acquisition or disposal of an interest in that business. The due diligence process includes the gathering, analysis and interpretation of financial, commercial, legal and marketing information.

It is extremely probable that the prospective buyer and advisers will want to put all the aspects of the company under the microscope.

Acquisition due diligence is the process by which the owner manager gathers information about the business being bought into so that he or she enters into the purchase with full knowledge of the facts. It will usually draw on experts with experience in making acquisitions who can guide the owner the owner manager through he process.

The preliminary phase in due diligence is the evaluation of the deal, whereby a preliminary assessment is made of the key risks and opportunities. These findings are then built upon in a subsequent detailed investigation.

The process of due diligence falls roughly into the sequence of an acquisition programme shown above.

A due diligence exercise is carried out to validate strategic ideas and to provide an independent review and support for assumptions underlying the investment appraisal. It identifies negotiation points and can help determine practical solutions for the tactical implementation of a strategy. It may also form the basis of the sales memorandum. In short, it is a report which has rapidly assimilated relevant facts marshalled as a document of record. The brief by the prospective purchaser will usually be to obtain everything possible concerning the target and its operations, he will appoint a team and ensure an appropriate mix of expertise and specify a job co-ordinator. It is up to the purchaser to provide clear instructions and confirm in writing what is being done and by whom, the order of importance of the tasks and to agree a price for the whole. It should be remembered that common causes of failure to achieve the acquisition?s commercial objectives are a lack of understanding of the market, a lack of quality of products/services, failure of management.

There are many areas of due diligence that ought to be of particular concern to a prospective buyer. These include employment terms and contracts, pensions, outstanding litigation, major contracts, IT systems and more.

Ensure that your investigating accountants and lawyers have acquisition experience. They will usually have preliminary enquiry lists to work from but do ensure you alert them to any particular concerns or issues so the list can be tailored to suit the circumstances.

Remember that in some industry sectors there may be special requirements. For example, if the target is an insurance company or a company which is registered under the Banking Act approvals or licences may be withdrawn if advance clearance to a take-over is not obtained: both insurance and Banking Act licences require the relevant authorities to be satisfied that the controllers of the company are fit and proper persons. A similar position may arise if the target company is engaged in investment business and registered under the Financial Services Act.

The Business Sale Report has partnered with legal and financial practices that have a high level of competence and experience in the carrying out of due diligence exercises. For a no-obligation discussion, please click here for legal advice or here for general/financial advice. If you require specific advice about corporate intelligence issues such as forensic accounting and corporate fraud, please read on.