When acquiring a company, an important part of the transaction process is the period for proper Due Diligence. During this period, the Buyer/Acquirer performs an in depth evaluation of the company and its assets. The theory behind Due Diligence holds that performing this type of investigation contributes significantly to informed decision making by enhancing the amount and quality of the information and by ensuring that this information is systematically used to deliberate in a reflective manner on the decision at hand and all of its costs, benefits and risks.
The actual time period required for this investigation depends on the size of the transaction. For smaller businesses this could take 7-14 days and for larger companies 60-180 days is the norm for a sale or merger. For small businesses the focus is usually verification of cash receipts, review of expenses, employees, the market place, location and customers. For larger transactions the categories reviewed include accounting/tax, inventory, fixed assets, legal, controls, staff, outside services, customer and vendor verification, operations, insurance, pensions and benefits, marketing, sales, competition, industry research, IT, environmental testing/compliance, etc.
Size also matters in regard to actually performing this work. For smaller businesses, typically the buyer will perform the work by himself or engage an accountant or advisor to assist. For larger deals, the acquirer will usually form a team of professional advisors to perform these duties. Each specific area is designated in a detailed Due Diligence Checklist and assigned accordingly. The cost of this extensive investigative work could easily reach six figures and beyond for larger multimillion dollar transactions.
Once Due Diligence is completed successfully, final legal agreements are drafted and the closing is set. Due Diligence is an important step in the buying process. It is imperative that you concentrate your efforts to properly investigate before you buy. Your findings will not only confirm your decision to complete the sale, but will also provide a blueprint for you to make the necessary improvements or to implement any changes needed as your move forward as new owner.
PUBLISHED IN THE SOUTHCOAST BUSINESS BULLETIN – JUNE 2014