Are you looking to buy a business or merge with another company? If so, you should conduct a due diligence before signing the paperwork and finalising the sale.
Due diligence is an investigation and analysis of the viability of the business you wish to buy or merge with. A valuable risk management tool for business and company buyers, due diligence should be carried out before any sale settlements are finalised.
What is involved in due diligence?During due diligence, a range of issues are considered including obligations, liabilities, business structure, finances and legal responsibilities of the company of interest. The exact elements of a due diligence will however vary depending on the industry.
Part 1: Preliminary PhaseThe preliminary phase of due diligence is an evaluation of the deal, where a preliminary assessment is made of the key risks and opportunities. This part of the due diligence process should ideally take place before the offer of sale has been accepted and may involve general research on the company and its operations as well as checking with Companies House on latest accounts and company reports. These findings are then built upon in Part 2 of the process, the detailed phase.
Part 2: Detailed PhaseThe detailed phase of due diligence is where the in depth research occurs to ensure all affairs are in order and get a clear picture of the business performance now and in the future. Any potential issues that require further clarification or assurance should also be made visible in this phase.
FinancialAs you may have guessed, financials are very important when making your assessment of the growth potential of a business. Depending on the size of the company you are purchasing, you may require information from a range of sources. Some aspects you may wish to consider include:
Commercial & MarketingYour preliminary research should have provided you with some idea of the market for your business venture including an appreciation of competitors and the regulatory environment. Now that you’ve made a firm offer that has been accepted, you can confirm your thoughts on the commercial viability of the business. Take the opportunity to have a careful look at the customer base and supplier contracts. From this, you can determine any major impacts with the change of ownership or merger.
Other AspectsIn some industry sectors, there may be special requirements that need to be fulfilled for a sale or merger so ensure you cover those aspects with your professional experts. For example, if you intend to purchase an insurance company or a company registered under the Banking Act, approvals or licences may be withdrawn if advance clearances to a takeover are not obtained. A similar position may arise if the company is engaged in investment business and registered under the Financial Services Act.
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