Due Diligence

When buying a business, “due diligence” refers to the process of reviewing all of the available information related to that business. The purpose of due diligence is to make sure that all legal and financial issues pertaining to the business are in order and that there are no unpleasant surprises should you decide to go through with the purchase.

There are a large number of things a buyer should carefully research when doing due diligence including but not limited to:

  • What is the state of the industry in which the business operates?
  •  Is the industry in growth mode, or is it mature or in decline?
  • What is the state of the business’s target market?
  • Is its target market growing or shrinking?
  • Are its target customers undergoing demographic changes, such as aging, loss of disposable income, or other transitions that could put the business at risk?
  • Is the business’s customer base growing?
  • Is the business adequately diversified, or is it overly dependent on one or two big customers?
  • How does this business compare to competitors in its industry?
  • How many competitors are there?
  • What are their strengths and weaknesses?
  • Why is the owner selling?
  • What are the sustainable future earnings of the business?
  • Will key staff remain in the business?
  • Are all staff long serving and competent?
  • Will any staff remuneration require increasing in the near future?
  • Are rents paid at market rates to an arm’s length Landlord?
  • Has the business benefited from exchange rate movements
  • Does any plant and equipment need replacing in the near future?
  • What are the barriers to entry?
  • Is the owners personal goodwill (or the business goodwill) easily transferable?

There are many more questions that should be asked in due diligence!

Sometimes a buyer may simply want to have a review of the financial accounts carried out during the due diligence process and get an independent view of the realistic value range for the business.

Other times, buyers may want their due diligence process to encompass a review of a number of key areas such as clients, staff, suppliers, leases, competitors, future earnings, key business risks etc.

When assisting clients with due diligence, I have a number of different checklists and approaches I use depending on the level of due diligence required by a given buyer.

A wise buyer will seek help from a professional who has been involved with the due diligence investigation of businesses.

The due diligence process is vital in assessing any business and should be considered as “compulsory pre-purchase insurance” similar to buying a property, (where it is wise to obtain a LIM -Land information report-and carry out careful due diligence on a number of matters relating to the property) and also when buying a vehicle, (where buyers should seek an independent report from experts such as the AA -Automobile Association).

Print Friendly, PDF & Email