Although it’s a legal term due diligence is something that really occurs every day. Just think about the questions which go through your head when you are deciding which plumber to phone: How much will they charge? Can they handle the size / complexity of the task? What is their track record? Do you know anyone who has used them before?
When purchasing a business, these questions are extremely important. Simply put, to purchase a business without undertaking appropriate due diligence, asking the right questions, is asking for trouble. The last thing you want to do is make a purchase, then be confronted by an unexpected risk or liability.
What is due diligence?
Due diligence is a question of…. well…questions. To ensure the right decisions are made it’s important to narrow down the right:
The questions and subsequent analysis will provide detail on a wide range of matters such as identifying:
Structure of the business
It’s important to find out what the terms of employment are and who the key people within the business. Do you know if the business has any domestic or international subsidiaries? What assets does the business have?
Risks and liabilities:
Understanding the potential strengths and weaknesses is smart. Do you know if the business is overly dependent on one contract or customer? Is the business party to any hire purchase agreements? If there are contracts that you would not want to continue find out if any contracts be terminated as a result of you purchasing the business.
As a new owner, you might be able to mitigate risks so it is important to understand the warranties and indemnities that are required in the sale agreement. There may be a benefit to withholding a portion of the payment for a period in case of an identified but only potential liability.
Enable a more effective approach to post completion opportunities
Explore what contracts are in place with major suppliers and whether they are there planning restrictions preventing further expansion?
Whether you are a buyer or a seller, the due diligence exercise is one that must be handled with care.
If you are considering purchasing a business and would like some further advice about any of these matters, please contact one of our experienced corporate team on 01383 721 621.