An Overview Of Due Diligence
To most, due diligence represents the period when a buyer will conduct a financial review of a business. That is partly right. While the financial review is of course a key element, the due diligence stage goes far beyond a simple review of the company’s books and records. In fact, the financial review is often times the easiest phase of this particular step. After all, numbers do not lie; they either add up or they don’t.
However, other components of the business including an in depth review of the customers, contracts, marketing initiatives, competition, suppliers, legal and corporate issues, key employees and other variables may not be so clear cut. In consideration of these important aspects to be reviewed, the most obvious strategy is first and foremost to allow yourself enough time to conduct an effective due diligence. This means that a buyer’s due diligence has to begin the moment a business is of interest.
Secondly, it is clear that allowing yourself enough time to conduct a thorough review is paramount. Many business for sale contracts and similarly the seller and their broker, will push for a very limited and restrictive due diligence stage. This is a ridiculous tactic and should never be accepted by a buyer.
Roughly half of all deals fall apart in the due diligence stage and the reasons are twofold. First, a buyer soon discovers that the reality of the business is not exactly as the seller represented. Second, when buyers have strong levels of uncertainty, or have not been able do enough research to determine the business will transition well to them, they will back out. As such, allowing enough time to conduct a satisfactory review will ultimately lead to more closed deals.
Buyers should also realize that sellers may be leery about disclosing certain information, which is understandable. Sometimes, buyers need to keep moving the process along and signoff of certain components in order to get to the next step. As an example, sellers will be reluctant to release any customer information too early in the discussions with a buyer. They also want to be certain of confidentiality and so a buyer may first need to validate the financials as an example.
The Internet is a phenomenal resource for business buyers and especially during due diligence. It is east to get information about the industry, associations, competitors, looming threats, financial analytics, and w host of other valuable information. These are all pieces one can investigate very early on in the process and must be done. Failing to do so will lead to uncertainty, and uncertainty will lead to walking from the deal.
One must consider the overall purpose of due diligence. It is the time to validate what the seller has represented. It is also the time to uncover every potential problem with the business moving forward. After the deal closes, it’s too late. Understand that no business is perfect. They each have warts and problems. However, by conducting a flawless due diligence, a buyer can compartmentalize and prioritize the issues, plusses, minuses and make a logical determination about the business’ future under their guidance. That is specifically what needs to be accomplished during due diligence.