What is Due diligence? and What does due diligence cover?

What is Due diligence? and What does due diligence cover?

Due diligence (DD) is the process of examining in detail the key constituent parts of a business, from the operational processes which control day to day trading to the detailed profit and loss and all that is contained within it. DD can cover many angles; the primary ones being legal and financial but also, there are commercial and HR considerations too.

A corporate financier will help you to scope out the requirements, which will include any specific requests from the funder for areas to be covered within the DD exercise.

The due diligence exercise will normally cover some form of validation of the following areas:

Customers

Suppliers

Profit and Loss

Balance sheet

Any one-off liabilities or warranties due

Any extraordinary items

Contracts, including those with customers/suppliers; employees or any external parties

HR and staff files

Operating processes, controls and procedures

Due diligence can last a number of weeks and normally DD experts can give you a fixed or capped price quote for the work required, which will include a formal report on completion. This report will be referred to when talking to third parties involved in the transaction and in particular, any funders. It will highlight any areas for concern or at least, ones where there might be a need to go back to the sellers to have a further discussion to clarify matters. Dependant upon the resolution of any outstanding matters, this might, in turn, affect the final price you pay for the business.

Please bear in mind, the due diligence exercise is the buyer’s responsibility in so far as the costs are borne personally by the buyer or his/her corporate acquisition vehicle. A corporate financier can assist you with the referral to a select a number of players who can offer their services but, the final decision as to who to choose to carry out the exercise is yours to make.

The DD exercise can be carried out by visiting the seller’s premises although confidentialities must be observed on the basis that staff at the company for sale are unlikely to be aware of the owner’s intentions to sell the business. Therefore, much of the exercise can be carried out remotely via email and Zoom/Teams interactions, perhaps with a  final meeting on site which can normally be accommodated under the guise of a “supplier meeting” or similar.