Business Due Diligence
Definition: Due diligence is the exercise of care taken before an individual or company enters into an agreement with another party, be it the purchase of a house or property, signing a loan or making any other important purchase. It can also be used to evaluate a potential partner and/or buyer. Business due diligence relates to the investigation – business, legal and financial – conducted on a business that is up for sale. This is done to establish the soundness and longevity of that business as an investment.
Before buying a business, it’s advisable to conduct a due diligence investigation on that business. Doing so will not only make the purchasing process more manageable and cost-effective in the long run, but it will also identify any aspects of the business that need attention presale. Because the investigation itself may be overwhelming and time-consuming, it is also advisable to engage the services of experts to assist. Grid Forensic Accounting’s financial experts are well-versed with the intricacies of due diligence investigations. We assist our clients by conducting appropriate checks and analyses that will enable them to make the best, most informed decision possible. We believe in empowering our clients before they undertake any contractual agreements that might prove costly or result in legal implications in the future.
Why business due diligence is important
There are a number of advantages to conducting due diligence investigations ahead of the sale process. Pre-sale due diligence helps the potential buyer to identify hidden or potential liabilities that may affect the investment value of that business. In addition, the process of due diligence will assist legal advisors when drawing up the transaction documents necessary for the sale of the business.
What does a business due diligence checklist consist of?
The documentation and information required for business due diligence will vary, depending on the nature of the business being sold and the transactional nature of the potential sale. Generally, the following information will be considered important for the potential buyer’s due diligence investigation:
- Information related to the organisation of the business: this includes operating agreements, agreements between owners/stakeholders, minutes of board meetings, ledgers and equity certificates.
- Financial information: this includes annual financial statements, annual reports and audits, and correspondence with auditors.
- Contractual information: this includes agreements with suppliers and consultants, employment contracts, and financial agreements such as loans.
- Legal information: this includes permits, as well as any documentation relating to legal matters, such as litigation, if applicable.
- Labour and staff details: this includes benefit plans for employees, salaries, bonusses, and holiday and sick leave policies.
- Intellectual property: this includes details relating to trademarks, copyrights, trade names and patents.
Business due diligence can greatly assist the buyer and seller in drawing up the terms of the sale agreement as well as settle on the value of a business once all the factors have been taken into consideration. Grid Forensic Accounting’s service includes assessing the financial aspects of a potential investment and helping to determine what the benefits, liabilities, risks and opportunities are. We do so by reviewing financial records, operations, legal and tax compliance processes, contracts, intellectual property and assets, interviewing key individuals, highlighting material information and identifying any red flags that arise.
Business due diligence costs
Fees may vary depending on the complexity of the client’s situation, the amount of documentation required for assessment and the extent of any relevant investigations.
We can provide an estimated cost by reviewing the prospective client’s information at our obligation-free initial consultation. No charge will be made for this review should they not continue with our services.