Due Diligence – an essential part of buying a business.
Due diligence forms an essential part of buying a business as it provides a bridge between making an offer to acquire a business and completing the deal at an agreed price. The whole purpose of due diligence is to ensure that the acquisition fulfils a company’s strategic goals, both commercially and financially. When looking to acquire a business, it genuinely pays to get the right information from the right people. Any offer made for a business should be “subject to due diligence” and therefore, the cost of a due diligence exercise can pay for itself hundreds of times over, if it is found that the business is not quite as what it seems, as portrayed by the Vendor.
In any acquisition, the scope of investigation for a due diligence report, will vary. As an example, an engineering or manufacturing business will have a critical supply chain and facilities with specialised production techniques and processes, whilst in service based businesses, customer relationships are more likely to be key.
What information will the buyer need?
With any acquisition strategy, the key issue is to consider exactly what information the buyer needs, in order to be comfortable with the targeted business and the offer being made. Currently, there is an increasing trend towards “commercial due diligence”, alongside financial, tax and all the legal enquiries.
As many acquisitions have multiple stakeholders (such as the purchaser, its bank and other equity providers), it is vital to have an agreement in place regarding the scope and timing of the due diligence required, which should all be agreed at an early stage. With regard to the report itself, it is recommended that the adviser concentrates on “exception reporting” focussing on the main issues of concern to the prospective purchaser. These points can then be acted upon by the Board to ensure that the target company can be integrated more successfully, as part of it’s strategic plan.
With the recession ending and more companies competing for acquisitions, there is a risk that purchasers will cut short their due diligence due to costs or time constraints. All the more reason to consider the requirements of due diligence in advance of the acquisition. Physician Thomas McCrae summed it up perfectly: “More is missed by not looking, than by not knowing”.
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Article sponsored by Simon Blake of Price Bailey LLP