The Importance of Due Diligence

Once you have made an offer for a business that has been accepted by the Seller, the next step is critical. This step involves the process of “Due Diligence”. Due diligence is the method through which as much information as possible is gathered by the Buyer to ensure that they have a full account of the business and what they are buying. With this account, a Buyer can decide to keep their offer at the same price, lower it due to potential pitfalls discovered through due diligence, or pull out all together. Since due diligence can have a major impact on your business acquisition, it is key to make sure it is done as thoroughly as possible, with professional help. In most cases, due diligence consists of financial, legal and commercial aspects, with all being equally important.

Financial due diligence provides the Buyer with a detailed summary of the accounts of the business they propose to purchase. This helps to uncover any financial risks within in the company, any contracts which may end or continue once you have acquired the business, study stock levels and examine any debt. Financial due diligence is key to the purchase of a business as it is fundamental to helping you shape your offer. A business with lots of potential risks or high levels of debt may give reason to revise your offer to a lower estimate, or pull out altogether.Â

Commercial due diligence looks at the standing of the business within the current market and examines the possibilities for growth or decline, and whether these aims are achievable or not. Should a business have solid potential for growth within its market, the valuation may go up, however, in contrast, should a business have poor growth potential, then the valuation is likely to decrease.
Legal due diligence involves ascertaining information regarding any possible legal risks surrounding the business. These could include the ownership of assets, any ongoing or forthcoming litigation and exploring the legal situation of any intellectual property that has been registered or could be registered by the new owners. As with commercial and financial due diligence, a positive result here will lead to a strong valuation and offer, whereas a weak result could lead to pulling out of the deal altogether.

Comprehensive due diligence in most instances will allow a potential Buyer to negotiate with confidence, or walk away from a business that could be laden with pitfalls, meaning it is a vital part of acquiring a new business.

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