What Is Due Diligence and Why Do I Need It?

buying a business

If you are looking to buy any business, however large or small, you need to make sure that it’s worth your investment. Once you’ve made an offer and that has been accepted, the next step is to carry out a thorough investigation known as due diligence.

What is Due Diligence?

All during the buying process you may have been given a wide range of information about a particular business. Due diligence gives you the chance to confirm that all this holds water and there are no hidden problems you are going to face once the business is handed over.

There are three different types of due diligence:

• Legal Due Diligence – this includes, for example, ensuring that the people you are dealing with have the right to sell the business in the first place and other legal factors that need to be taken into account.

• Financial Due Diligence – this covers the finances of the business and ensures there are no hidden issue or monetary problems that could come down the line. It includes taking a closer look at the books, usually by someone like a qualified accountant.

• Commercial Due Diligence – you also want to know that the company has a place in the market and is going to thrive. This also includes checking out any regulatory environment that needs to adhered to.
You can’t really start due diligence before you have agreed the price and set terms for the transfer of the business. Once this has happened, it’s not unusual for the company to take their listing off the market while you carry out the various forms of due diligence.

The Benefits of Due Diligence

As an outsider, you’re not going to know everything about a particular business. Unfortunately, it can sometimes be the case that a current owner may have something to hide which could be detrimental to you and future performance.

Due diligence covers a wide range of factors, not just that the business for sale is in a good financial state. For instance, it can look at employment practices and contracts, relationships with suppliers and other third parties, any outstanding legal issues, and even environmental problems that could impact on the sale.

Most of this information should be contained in the company records such as staff files and payroll information, as well as financial statements and staff manuals.
When you have carried out your due diligence properly, by the end of the process you can be confident to a high degree that everything is ready to move forward. On occasion, though, it can reveal problems and issues that have been carefully hidden away.

The onus is on the buyer to carry out the due diligence properly – that’s why you need a good team in place who know what they are doing and what to look for. While this may well cost a little bit extra, it’s worth the investment, even with smaller companies where there may not be so much information and data to work through.

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