What is Due Diligence?

What is Due Diligence

Whatever industry you are involved in, if and when the time comes to expand, it is vitally important that you understand the concept of due diligence and how it’s carried out. Due diligence is one of the most critical aspects of a business transaction, which involves debt or equity.

In the case of equity i.e. selling of the business, due diligence process enables the prospective buyer to validate essential information such as confirmed contracts, the verified finances of the company, and a list of confirmed customers, amongst other things. Once all of this information has been collected, the prospective purchaser is then in a much stronger position to make an informed decision with all of the guesswork removed. Similarly for debt transactions, depending on the size of the loan, the lender might want to conduct financial due diligence on the business to understand and confirm the financial position of the company.

The due diligence during a business sale process typically begins upon signing a letter of intent and entering exclusivity with a buyer, on debt deals it normally commences on receipt of credit approved terms. This offers some protection to the seller as any potential buyer has to demonstrate that they are serious about moving forward with the purchase before they are given access to this sensitive information. Similarly, on a debt deal it shows the lender is willing to move forward and just wants an independent view on the financial standing of the business.

The Due Diligence Process In Greater Depth

The due diligence process is essentially an in-depth audit of the company’s financials (historical and projected). Its purpose is to confirm all of the facts and identify any potential red flags that might negatively impact the future of the business. It should be thought of as a safety net for any prospective purchaser/lender before entering into a financial transaction. Although the bank balance or the balance sheet of a business may look healthy, any investor needs to understand the obligations of the company, which includes their debts, the length and details of any leases the company may be committed to, and distribution agreements the business has, any potential lawsuits, compensation agreements, and employment contracts.

Are There Any Companies That Specialise in Implementing the Due Diligence Process?

Getting your due diligence process wrong could potentially be catastrophic for any company, as you could become liable for any debts or compensation claims the company you are purchasing is accountable for. That is why it is essential to use a company that specialises in complex financial matters. AW Capital has assisted a number of companies in the United Kingdom with the due diligence process. We understand all of the various pitfalls and can ensure that, as a potential purchaser, you have all of the information you need to make an informed decision.

How Long Should The Due Diligence Process Take?

There are many factors to consider when conducting due diligence, which means that the overall process could take anywhere between a few weeks to many months. Some of these factors include the size of the business, the financial complexity of the accounts, and any purchase agreements which have already been signed. For the majority of small businesses, the process should not take more than 60 – 90 days; in fact, if it takes much longer than this, then that may mean there are underlying issues that have yet to come to light. Always remember to judge the business on its merits, and do not fall into the trap of buying a business for sentimental or emotional reasons. The head should always rule the heart in business transactions.

If you are contemplating merging with or acquiring a business, contact AW Finance today on 03337726165 so that we can work together with you to ensure the process runs as smoothly as possible.

What is Due Diligence