What is Due Diligence?

When negotiating a deal your aim is to convince someone that any money they put into your business will provide solid returns on their investment. They need to be sure of the facts and confident that they are making a wise decision. Due diligence is that assessment process.

Unless you are familiar with what is involved, it can sound a bit daunting to hear a due diligence team is going to show up and look into your business. Put in everyday language they are simply going to ‘check you out’.

Their aim is to:

  • verify the information provided is correct; and
  • discover any undisclosed problems.

The due diligence process is all about mitigating investment risks. By the end of our due diligence process, you should have a fair idea of whether the client or business you are thinking of dealing with is worth the investing of your time; or whether the business you wish to acquire is worth the investing of your money. A comprehensive due diligence is a financial, legal, operations and human resources investigation on a particular company or entity, comprising the risk reviews in respect of a particular company or entity. It is usually required in respect of potential acquisitions or mergers and consists of the following checks:

  • The past and forecast financial performance of the business.
  • Key indicator reviews completed (ROI, cash flows, ratio, profit margin).
  • Accounts.
  • Share dealing and ownership.
  • Directors, board activities and background.
  • Review of representations and warranties to determine reasonableness based upon the transaction.
  • Valuation of property and other assets.
  • Legal and tax compliance.
  • Outstanding legal action against the business and its legal history.
  • Major customer contracts.
  • Benchmarking against key competitive metrics.
  • Intellectual property protection.

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