Due Diligence In business

Before purchasing a business, it is crucial that the purchaser undertake a comprehensive survey of the business in order to avoid any dangerous surprises which may lurk post-acquisition. This article presents a broad overview of due diligence reviews.

What is Due Diligence?

  • Representations which are made to the prospective purchaser are not false or misleading.
  • Representations made to the prospective purchaser do not represent aspects of the business other than as they actually are.

Due diligence is necessary to limit reliance placed on vendor's warranties - it is better to discover a "skeleton in the closet" before the business is bought than afterwards. The costs of buying a business with unexpected difficulties can be ruinous. For example if key personnel or anchor clients depart shortly after purchase substantial resources may be needed to correct the problem.

More than an audit

A due diligence review is not an audit. It differs from an audit in that the latter is concerned with the truth and fairness of historical financial statements only. The scope of a due diligence review is generally wider - it would include a review of historical figures as one of its elements. A mere audit of the vendor's financial statements, while helpful, would be inadequate in that, for example, it would not entail a review of the basis on which projected earnings were estimated and whether this was sound, nor would it address some of the operational aspects of the business.

Characteristics of a Due Diligence review

  • Each due diligence review and report is a unique product arising from a unique investigation approach determined by the unique circumstances surrounding the target under investigation and the requirements of the investor.
  • Flexibility in the approach adopted is critical. Reliance on a checklist style of investigation is likely to lead to important non-financial matters being overlooked.

The key to the performance of a successful due diligence exercise, which is usually performed under extremely tight deadlines, is the utilization of an experienced team of specialists.