Due diligence is a key process during a business acquisition and provides the information you need to complete a transaction with confidence. Delving deeper into the background and operational workings of a potential new business is crucial to ensure the details provided by the seller are reliable.
The time it takes to conduct due diligence depends on the size of the target business and the complexity of its affairs. By the end of the process, however, you should have a clearer picture of the business proposition in front of you and be able to make an informed decision on whether to proceed.
What is covered by due diligence?
The broad areas covered during due diligence include the business’s structure, operations, finances, assets, legal issues, staffing, and marketing. It’s a comprehensive fact-checking process and scrutiny that should bring to light any existing or potential problems.
Depending on the industry the business operates in you might decide to place extra focus on certain elements. In construction, for example, funding, credit control, and cash flow are key areas.
Due diligence checklist for acquiring a business
Legal
· Company constitution and structure
· Litigation, past, ongoing, and potential future legal claims against the company
· Contracts, including suppliers and customers
· Insurance policies and any claims made on them
· Property leases and contracts
· Tax returns
· Health and safety, regulatory matters, and compliance
Financial
· Annual reports
· Company accounts
· Cash flow and profit and loss
· Share values and shareholders
· Expenses, debt, and equity
· VAT
· Payroll
Operations
· Products and services, including warranties and any customer complaints
· Processes, such as manufacturing and sales
· Company values and culture
· Pricing and profit margins
· IT systems and equipment
Company assets
· Identifying fixed and variable assets
· Intellectual property rights attached to intangible assets, such as trademarks and patents
Employees
· Current employees’ salaries and roles
· Pension schemes and other staff benefits
· Employee contracts
· Hierarchical leadership and management structure
· Staff leave and absence policies
· Staff turnover
· Any cases of employee litigation
· Onboarding and offboarding procedures
Marketing
· Marketing budgets
· Campaign results
· Brand recognition by consumers
· General perception of the business within its sector
Who can help you with due diligence?
Seeking help from professional advisors, such as lawyers, accountants, business sales agents, and tax experts, means you can trust the results of a due diligence check and benefit from a comprehensive report that covers all potential risks.
If you’re already a business owner, your management team should also be able to offer you support in areas such as marketing and IT and how the new business will fit into your existing portfolio.
The importance of due diligence during a business acquisition
Due diligence ultimately allows you to establish whether a fair value has been attached to the business, and if not, provides the evidence to negotiate the terms of sale or reopen negotiations on price.
The concept of ‘caveat emptor’ in English law – ‘let the buyer beware’ – makes due diligence an essential element of acquiring a business. Without completing this process, you risk
taking on a business with significant issues for which you become responsible as the new owner.
It highlights areas of risk that might not otherwise have been apparent – for example, ongoing customer or employee claims against the business. It’s clear that a thorough due diligence process conducted by relevant experts underpins a successful business acquisition and ensures that you make the right move at this important time.
About the author – Chelsea Williams is an experienced debt help adviser at Scotland Liquidators who specialises in the range of insolvency options available to companies and individuals in Scotland.
