Due Diligence – The Basics

This note takes a brief look at why due diligence is done and what information is investigated.

Due diligence is the process by which the buyer of a business gathers information to build as complete a picture as possible of the business and the issues that will be relevant to the aquisition. Examples of such issues are: ownership of assets, title of assets, condition of assests etc. Of course there are various different types of assets for example property, intellectual property, stock, raw materials etc. Different businesses will have different key assets so it is important to identify these at an early stage so that they can be thoroughly investigated.

Gathering this information will impact on the negotiation process i.e. the price the buyer is prepared to pay and also the warranties and indemnities that the buyer will be seeking from the seller. Buyers often hide behind these warranties to protect them should any problem arise after completion. Whilst this is what the warranties are for it is preferable to find out about serious probles before the purchase in order that an appropriate reduction be negotiated. In carrying out its due diligence the buyer is likely to rely on a number of information sources:

Information memorandum – This is prepared by the seller and is an information pack aimed at selling the business. As such all details contained within it shoudl be carefully scrutinised.

Buyers enquiries – This contains material made available by the seller as well as publicly available material for example IPO searches, company searches etc. It will also include a series of queries regarding the details provided by the seller.

Accountants’ report – it’s in the name, a report prepared by the accountants’.

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