Due diligence is an extensive review or audit of a business that happens before the acquisition is completed. It involves verifying the information researched or supplied about the prospective business, including financial documents, legal issues, operations, employee relations, asset treatments and physical condition, product and customer data.
By confirming the legitimacy of the opportunity and analysing essential information to confirm the condition of the business they want to acquire, a buyer protects their position and gains true insight into the opportunity. Ensuring any decision regarding the acquisition is an informed one maximizes the chances of adding value in a transaction.
Due diligence also obtains information pertinent to valuing the deal, and ensure the transaction complies with the deal criteria.
*The process*
Throughout due diligence, it is important to consider the following areas:
Examining the financial performance of the business until the present date and ensuring that the numbers presented in the financial statements are accurate and sustainable.
Focusing on all legal aspects of the business and its relationships with its stakeholders. This includes licenses, regulatory issues, contracts, and any pending legal liabilities.
This usually includes assessing business procedures, operational locations, inventories and suppliers and full details of the business’s insurance cover. It should also include looking at all employee information, from the management structure, to payroll, and HR policies and procedures, as well as a verifying customer databases, sales records, advertising, and research.
Reviewing the business’ tax affairs and ensuring that its tax liabilities are paid in full to date. Due diligence in tax would also look at how a merger would affect the tax liabilities of the new entity created by the transaction.
As part of due diligence, assess the growth potential to quantify the likely return on your investment. This means analysing performance and profits in addition to identifying the specific elements that are driving the value of the business.
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