If you’re considering buying a business, you may have heard the term ‘due diligence being thrown around in conversation. You may have heard of the term in the world outside of business sales too – because due diligence is a common term for investigating and fact-checking legally and financial details prior to a transaction being completed.
When purchasing a business, a buyer would be advised to conduct thorough due diligence before the sale takes place. What does that involve?
The process is led by the potential buyer and is facilitated by other professionals involved in the sale process (typically his Accountant and Lawyer).
Due diligence involves the review of all information provided to ensure accuracy; verifying financials and inspecting records before making a concrete and final decision to confirm the purchase.
Examples of documents that are included in the due diligence review include, inter alia:
If a buyer does not invest time and effort in a thorough due diligence process, they place themselves at risk in the business sale, as they are essentially purchasing blind and relying on good faith. Think of it this way, if you were buying a very expensive car, would you read the advertisement and believe everything it tells you without taking it for a test drive and getting a mechanic to check under the bonnet?
Think of a business sale in the same way, except instead of a mechanic checking the engine, it’s a financial advisor and lawyer checking the business from the inside out.