Due Diligence

What’s the importance of Due Diligence?

Are you in the process of buying or selling a business? Before doing so you will need to do a due diligence review.

It will allow you to confirm that the business is what it appears to be, identify any “deal breakers”, and gain information to better value and negotiate the asset.

The amount of due diligence you conduct is based on many factors, including prior experiences, the size of the transaction, the likelihood of closing a transaction, tolerance for risk, time constraints, cost factors, and resource availability.

It is impossible to learn everything about a business but it is important to learn enough so that you lower your risk and make good, informed business decisions.

A due diligence audit will usually consider whether:

• intellectual property is securely held;
• key trading contracts are in place;
• key employee employment contracts exist;
• each business premises lease is locked in; and
• litigation exists or is threatened.

Buyers want to verify and confirm they will be getting what they are paying for. Any sign of deception or even a simple lack of candour could soon erupt into open mistrust. Once that negative reaction occurs, the deal will likely sink or a substantial discount will be demanded in order to keep it afloat.

This is where commercial due diligence outcomes turn into real dollars. An enthusiastic buyer may be more willing to pay a slightly higher price or a larger premium. It is conceivable that you may be easier to push for a price that is 5 – 10% higher for a well organised business. Similarly, the price may be discounted for a comparable business if the buyer’s enthusiasm has dwindled through a lack of confidence in the product, the team or the records.

Depending on the valuation, a change of confidence or enthusiasm could equate to a serious amount of lost cash.