How Important Is Due Diligence?
Very. Due diligence is very important.
As an M&A firm, it is so exciting to see an offer accepted and a seller looking forward to passing the business on to a new owner. And often, this excitement pushes for the rushing of the closing process. However, even though the future of closing is thrilling, the process ahead is essential. And this process is called due diligence.
What is Due Diligence?
Due diligence’s meaning is to ‘have a measure of prudence’ or to ‘perform a prudent review’. In the context of mergers and acquisitions, this becomes a form of legal, operational, and financial review—verifying the claims and accuracy of the information provided by the seller. While this is similar to an audit, it differs by specifically focusing on the asserted information given to the buyer by the seller. Most of this information has been formed from the financial statements, so due diligence allows for the assessment of benefits, liabilities, risks, and opportunities based on these documents. Due diligence also helps recognize any potential problems or liabilities related to operations, finances, or legalities. This review then allows for the assurance of the accepted price and the claimed value of the company by the seller. Here’s a fun video I found that helps break down the concept of due diligence.
Why Does it Matter?
Due diligence matters because buying a business is no small task. When purchasing a business, there is a great deal of money and time involved. And often, before and in the negotiation phase, a buyer does not gain all of the information about the business. And sometimes, the quality of the financial information can vary. So, mainly, due diligence gives the buyer peace of mind upon purchasing a business—seeing the full picture of what they are stepping into. And from a seller’s point of view, due diligence allows them to understand the true value and integrity of their business, which is extremely important as an owner, specifically an owner that wants to sell.
What is Included?
What is included in the due diligence process can vary from business to business and from buyer to buyer. It is depended on not only what the buyer wants and needs, but also what is needed for the bank, broker, investor, lawyer, etc. But here are some of the items that are generally needed:
- Financial information and performance
- Company history and background
- Company structure and organization
- Cash flow assessment – now and future
- Legal reviews
- Company sustainability
What are Common Pitfalls?
As stated before, buying and selling a business is exciting. But that excitement can lead to some errors in the due diligence process. Some common pitfalls include:
- Shortchanging the process
- Not involving field experts
- Not assessing a company forecast and working capital assets
- Relying on unaudited information
Due diligence is easily the most time consuming and often frustrating part of a merger and acquisition. But it is an essential step. Obtaining accurate and important information about a business allows for a smooth transition without surprises.
Here at The Firm, we have a team of highly qualified advisors and a legal in-house counsel that walk our buyers and sellers through the entire due diligence process, so that the buying and selling process can remain exciting. If you would like to talk about our process, contact us here. We would love to step along side you if you are wanting to buy or sell.
For more information, check out these sources:
SecureDocs's Why Due Diligence Matters
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