Conducting thorough due diligence is one of the most effective ways to reduce the risk involved in business transactions and to improve the chances of success.
The fundamental purpose of a buyer’s due diligence investigation is to gather information that will help assess the value of the target business, in light of all the facts and circumstances.
Due diligence is the examining of the financial, commercial and legal activities of a business in connection with the possible acquisition by a third party. This information allows the buyer to make an informed decision on whether to proceed with the proposed purchase.
“Due Diligence” essentially means to make sure that all the facts regarding the business are available and have been independently verified. In some respects, it is very similar to an audit.
Due Diligence is usually carried out by the buyer in conjunction with your accountant and other business advisors. You may need their help to assess some of the technical or financial areas, such as the accounting and financial records. The amount of due diligence carried out will depend on the size of the business and what is required.
When to begin due diligence?
The investigation period is negotiable, but most small businesses require at least three to four weeks to examine their books and records. Due diligence allows your financial experts to verify the information about your prospective new business. It should give a realistic picture of how the business is performing now and how it is likely to perform in the future.
A closer look at financial due diligence.
Financial due diligence analyses, qualitatively and quantitatively, how an organisation has historically performed financially in order to get a sense of its earnings and potential. It’s crucial to use these findings to look at the anticipated performance of a business as represented by the seller, to look at the underlying assumptions used in preparing their projections, and ensure they are reasonable and objective.
Often times, companies can understand the future by understanding the past — it’s important to assure a plausible bridge can be built to meet the expectations of both the buyers and sellers.
Due Diligence – the key areas to cover
All the documents of the firm are assembled and reviewed, the management is interviewed and a team of financial experts analyse the information to see if the business is worth buying.
In addition, financial due diligence analyses the assets and liabilities to be acquired.
Due diligence includes a critical review of the target company’s financial statements for the past several years and a review of the financial projections for the coming years
Other areas which are analysed are:
Minutes and consents of the board of directors and shareholders
Patents, copyrights, and other intellectual property-related documents
Licenses and permits related to the operation of the business
You need to come out of this period knowing exactly what you are getting into. What needs to be fixed, what it will cost to fix, and if you are the right person to take on the business.
Effective financial due diligence is crucial to success and is the essential step to reducing the risks inherent in deals and business partnerships.