There are a number of reasons why carrying out due diligence is critical, including challenging information provided by a vendor, assisting with negotiations and highlighting any risks and weaknesses.
Financial Due Diligence
This is a key aspect of investigating a business and although each assignment has a specific scope of work to be undertaken, there are a number of areas that typically will be part of the due diligence exercise including:
- Historical trading performance and impact on cash flow and working capital requirements
- Assets and liabilities
- Financial projections prepared by the company or the management team in the case of an MBO
- Underlying financial systems and operations
- Taxation matters and potential issues arising
We have provided our specialist services for a number of banks, ABLs and private equity providers in regard to acquisitions and MBOs. Regardless of the economic environment the value of due diligence is unquestionable. It is not possible to measure the benefits that due diligence can deliver, however the potential costs and issues that may arise if due diligence is not undertaken could turn out to be extremely expensive.
Commercial Due Diligence
This looks at providing information on the operations and strategy elements to a business including customers, markets and competitors and how well the business is prepared for potential change both internally but also externally where they have little or no control.
Due Diligence undertaken should highlight the potential areas of concern, enabling the potential acquirers to be in a position that will allow them to make the necessary changes post deal to eradicate or at least dilute the impact of those areas discovered during Due Diligence.
Legal Due Diligence
As with the other forms of Due Diligence, legal Due Diligence is principally there to obtain sufficient information about a business to enable the acquirer or investor to decide on whether to proceed with the transaction. The information provided and the responses gained to questions raised as part of the exercise will also enable lawyers to tailor agreements and warranties in line with the comfort or not that is obtained during the Due Diligence process.
Having experienced corporate lawyers that are familiar with the process of Due Diligence and the information and time requirements that go hand in hand with it, is critical to ensure the transaction has the best opportunity of completing and within acceptable timeframes.