What is due diligence?

When buying anything, it is important to know just what it is you’re getting for your money. The purchase of a business is no different and the due diligence process is a key element to a successful transaction. In this article, find out the facts regarding due diligence.

Introduction and meaning

A simple way to define due diligence, and in particular, corporate due diligence, is a process undertaken by the purchaser of a business to obtain sufficient commercial, financial and legal information about the target company to support the proposed acquisition. Depending on the scale of the sale and purchase in question, a purchaser may feel that they are capable of carrying out the necessary checks themselves. In most cases however, where there are a number of complex issues to consider, it is sensible to instruct experts to perform a due diligence audit.

Areas commonly covered

Examination of accounts Although a business may have traded well and been profitable in the past, it is important to know the up-to-date financial position. A thorough examination of the accounts is therefore essential to confirm the financial health of the company and its compliance with all tax obligations at the actual time of purchase. As part of the financial due diligence procedure, it is also important to check the sales and financial forecasts to gauge the likely performance going forward and to obtain up-to-date valuations on property and other assets. There are also aspects of a business purchase that require legal due diligence and it is essential to obtain advice on the fine detail of the following: · Possible legal action outstanding against the business,
· Major supplier and customer contract terms,
· Employee contract terms,
· Protection of any intellectual property.

The wider picture

The term due diligence doesn’t only refer to the sale and purchase of a business, and many industries need to apply a level of it to their everyday trading. For example, banks and financial institutions need to constantly carry out customer due diligence to guard against the illicit gains of criminals being laundered through their accounts. Bankers Almanac The banks also have to be diligent when dealing with a bank counterparty at the other end of a transaction and to ensure that it is a bona fide institution. In this respect, the Bankers Almanac is an indispensable tool. What was once a huge book published annually, is now an online database containing comprehensive information about the world’s banks and financial institutions including ownership, credit ratings and financial strength.