WHAT IS MEANT BY THE TERM ‘DUE DILIGENCE’ ?
This term started to be used decades ago in the USA and it has gradually morphed into common use where a buyer of an asset must undertake certain processes to investigate the offering and satisfy themselves as to the risks of acquisition. The term describes a general duty to exercise care in any transaction especially where the interests of the parties are not identical. Clearly there will be a focus on risk.
So ‘due diligence’ describes the processes you implement to satisfy yourself as to the veracity of what you are buying.
The scope of the due diligence process will depend on the target asset.
There are clearly a huge number of matters that could be the focus of due diligence but for the purposes of this blog it will be confined to discussing the acquisition of a small business. Before you try to scope out the due diligence process it is vital you appoint the right person to head up your team. In a significant number of cases this should be your accountant but it could also involve solicitors, real estate experts and valuers and other industry specialists to help with the assessment of the target offering. In my experience, the buyer should NOT conduct the due diligence [DD] themselves. It is important that the buyer remain ‘willing but not anxious’ during this process and the participation of an objective team of experts can help with objectivity and an arms length view of the matter. It is important to keep emotion out of the process and to rely on your external team to assess past, present and future KPI’s.
Once you have picked your DD Team it is up to them to identify the key areas to investigate and report on.
It is not possible to outline all of the checklists that should be covered but there is plenty of on-line material and text books on the subject. Suffice to say, there are some important points worth noting:
- DO NOT do the DD yourself
- always look at your EXIT strategy BEFORE you buy the business
- it is not 100% about the target, there are some issues on your side of the transaction that must be considered i.e.
- your health
- the amount of debt required to fund the acquisition
- have you got the skill set to manage the business
- your marriage and lifestyle impact
- tax ramifications
This is not intended to be an exhaustive review of the DD process but rather a reminder as to how important it is and how vital it is to get professional help from an experienced accountant to start the process and then quickly involve other experts as the plan of attack unfolds. This is not an area for well meaning but inexperienced people. You want talented, experienced people who are able to bring in outside assistance quickly and effectively to augment the team and provide you with the best data and information on which to make your decision.