‘Due Diligence’ is the collective term for the analysis of a business. A series of questions made by the buyer and a series of answers provided by the seller.
The process normally occurs in tandem with the negotiations and is arranged by the buyer’s legal team.
Any assessments of the target company usually focuses on the financial, legal and commercial aspects of the business.Â These are carried out by financial and legal advisers to the buyer, so that the buyer can fully assess the company’s advantages and disadvantages.
The financial assessment leads the way, bringing to the foreground any risks or acquisitions the company may have. This is discovered through several meetings with the company’s management team as well as looking through their accounts. The legal and commercial assessments occur at the same time, but normally take longer due to the level of information required. A questionnaire is written for the company by the buyer’s solicitors on all aspects of the business and is completed by the seller, who returns the questionnaire with all the necessary documentation.
When this has been done, the accountants and solicitors analyse all the information as well as assessing any other outstanding areas to the company if relevant (e.g. environmental factors). This means that the probability of any information being missed is reduced and firm advice can be given to the buyer.
Finally, the buyer makes a decision on whether to do a deal or not based on the information found through ‘Due Diligence’. If the buyer does invest, the legal team then proceeds to draft a share purchase agreement before the buyer’s accountants and solicitors help to draw up warranties covering areas highlighted in the due diligence.
If the buyer based on the due diligence decides he does not wish to invest, then due diligence has done its job and the buyer has avoided buying a pup!
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