Due Diligence – What is it, and when is it done


 

In almost every business exchange transaction a due diligence review is conducted before money changes hands. Similar to someone buying a motor vehicle, where they will not pay for it until they prove the vehicle does what the salesperson says it will do, at an even higher level, buyers of businesses must make sure the cash flow and assets of a business are what the vendor says they are.

Due diligence is the name given to this process where buyers and their advisors undertake an audit to assess the financial performance and determine the value of business assets. Does the representation made by the vendor about the business stack up?

Usually, this is conducted after both parties have executed a conditional Contract of Sale and a deposit paid. Once the buyer is satisfied by the due diligence that everything is as it should be, the Contract of Sale become unconditional and settlement and handover occur.

The key for a seller is to be well prepared. Delays in providing information during the review can turn into deal-breakers, resulting in the buyers walking away.

Business owners may only ever sell one business in their lifetime. This lack of experience can make the scrutiny of a due diligence process very stressful. Employing experienced advisors who understand due diligence processes, assist in planning for it, and walk with vendors through it, are invaluable.

Many buyers use their internal or external accountants to undertake due diligence process. They are always very thorough. Let’s assume their client buys the business and the business underperform or some assets aren’t up to scratch, the accountant will be the first person the buyer interacts with quickly. Hence the deep scrutiny prior to settlement.

 

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