What is Due Diligence?

If you’re thinking of buying or making an investment in a business then you want to be certain exactly what your money is being spent on. In simple terms, that’s what the process of due diligence is all about. It involves investigating and auditing the details of a potential deal or investment and confirming that all of the financial information gathered is correct. 

A due diligence check should take place before any deal actually closes in order to reassure the buyer that they know exactly what they’re getting for their money.  

Why the due diligence process matters

A deal that has undergone full due diligence prior to being finalised is a deal that is far more likely to be successful. From the buyer’s point of view, the due diligence checks will reassure them that the assumptions they based their decision to make the investment on were in fact correct. If a decision in an area such as business consolidation, or mergers and acquisitions (M&A), is taken without due diligence having been performed, the risks to the buyer increase dramatically.

At first glance it may appear that all of the advantages of due diligence rest with the buyer in any deal, but it also offers benefits to the seller. In some cases, for example, the in-depth and comprehensive nature of the financial inspection that is carried out during due diligence might uncover the fact that the fair market value of a company is higher than the price that was originally being asked. For this reason, the seller might opt to  undertake due diligence on their own behalf before any potential transaction takes place, in order to arm themselves with the information needed to negotiate as successfully as possible. 

How much should due diligence cost

The cost of an individual due diligence process will be governed by the complexity of the deal being examined, but any expense involved is easy to justify on the basis of the risks involved in not undertaking due diligence. The issue of who actually pays for the cost of due diligence needs to be negotiated between the parties involved in a deal. In most cases both buyer and seller will employ their own specialists such as accountants, lawyers and investment bankers. The fees charged by experts such as these will make up the bulk of the cost of any due diligence process. 

What questions need to be asked during due diligence

The precise questions to be asked during the due diligence carried out will differ from deal to deal, with many being industry specific. The following are a few of the typical questions to be asked in a range of mergers and acquisitions:

• Why is the business being sold?

• Has the seller attempted to dispose of the business previously?

• How complex is the structure of the business?

• Has the business recently acquired or merged with any other business?

• Have any financial statements related to the business been audited?

• How credible are any future financial projections the business is presenting?

• How much working capital does the business require? 

• Is the business carrying any debt, and if so what are the terms of that debt? 

• Does the business own any patents or trademarks?

• How are any trade secrets the business depends upon protected?

• How will the business fit in with the buyer’s existing business interests? 

• Who are the best customers of the business?

• What structures does the business have in place for paying incentives and bonuses to employees?

• Is the business currently threatened by pending litigation?

• What are the terms of any settled litigation?   

• What does the business spend on IT provision each year?

• Does the business have a disaster recovery plan in place for its IT infrastructure and data? 

The list could also include issues such as the marketing approach of the business, it’s stance on environmental matters and the corporate structure. The golden rule line is that anyone entering into a deal with another business should ensure that all the questions they have are answered in depth before signing on the bottom line. 

We can help

If you’re thinking of buying another business then the cash payment systems used by that business could have a huge bearing on your decision. If they work with GoCardless then you can be sure that they handle payments as efficiently as possible. This includes the more complex aspects such as dealing with ad hoc payments or recurring payments.