What is Due Diligence?
Due Diligence (or DD) is when an investigation or audit of a potential investment is performed. This serves to confirm all material facts in regards to a sale. Due Diligence refers to the responsibility and care a person should take before entering into a deal with another party.
Vendor Due Diligence
In larger deals the due diligence is usually done by the seller,but not in all cases.DD is mostly performed by an outside firm such as C.R.E.P. at the vendor’s request. This facilitates in the sale of the company as hard evidence of the company’s finances are presented to the potential buyers. This is called a Financial due diligence report.
The financial due diligence report will contain information such as, the financial health of the company. This will include items like the main business drivers which determine the company’s performance. This data will only be shown to prospective buyers once our firm has established that the interested party is a serious buyer and not just looking to get information about your business.
The seller can also do due diligence on the buyer. For example, to see whether the buyer has the ability to buy his or her company.
Advantages of Vendor Due Diligence
Vendor Due diligence will most lightly not replace the buyer’s due diligence. However, it will reduce it. Thus speeding up the sales process.
If Vendor Due Diligence is performs well and by external accountants, the level of credibility (pertaining to the numbers and facts of the business) is increased.
As well as gaining confidence in the fact that the seller is willing to sell. Buyer tent to have more trust in the seller overall.
Potential buyers who don’t go through with a purchase for one reason or another, at times become future competition for the seller. Due Diligence done by the vendor decreases the amount of sensitive data given to the potential buyer.
Having the due diligence done will avoid the need for multiple potential buyers doing due diligence over and over again.
Buyer’s Due Diligence
From the buyer side when given data about a potential business for acquisition. The Data should always be verified. Once you have made an offer a period of time is given for Due Dilligence (Checking if the Data is Correct). The information provided by the seller should give you a realistic view of how the business is performing. As well as give you an idea of how it will perform in the future. This should give the buyer the chance to highlight any items or problems that arise when doing the Due Diligence.
Advantages of Due Diligence
Here are some of the advantages:
- You as a buyer are assured that the data provided is correct.Thus improving your decision making.
- The buyer gains better control of the acquisition process.
- Having your own Due Diligence done well will improve your position to negotiate a better price.
- You will be able to better evaluate the risks involved.
- Gives you insight into the overall stability of the business.
- Due diligence on the buyer’s side helps in avoiding costly mistakes.
For further information on Due Diligence for the sale or the purchase of a company, contact us.