When buying a business, due diligence is EXTREMELY important. This is where most deals fall apart – the proverbial skeleton is discovered in the closet – the value of the business isn’t what buyers perceived it to be, so they walk away.

Before committing to a deal, buyers want to know the asset they’re getting is not impaired due to unknown issues.

Due diligence is especially important in private company transactions, as they are not subject to regulation and their information is not public. Most companies engage an M&A specialist to help with due diligence, as it is an exhaustive process and they know what to look for.

Below is a list of the most commonly analyzed areas in due diligence:

  • Financials – reviewing to ensure the validity of profits and cash flow
  • Technology & Intellectual Property – review IT infrastructure and any patents, trademarks, etc.
  • Customers & Sales – understand the company’s customer base and retention
  • Strategic Fit – how will the pieces work together once merged?
  • Legal & material Contracts – review of all material legal contracts of the business (i.e. lease, debt agreements, employee agreements, etc.)
  • Employee Issues: assess health of the HR function and employee relations
  • Litigation: review any open/pending litigation for contingent liabilities post-close
  • Tax Matters: determine any open liabilities or any carry-forward assets
  • Regulatory Issues: ensure compliance and evaluate completeness of adherence
  • Insurance: is the business properly protected against risks and will additional coverage be necessary post-close
  • General Corporate Matters: review organizational documents and corporate records
  • Environmental Issues: audit for risk of hazards or noncompliance
  • Related Party Transactions: any direct or indirect interest by an owner or other stakeholder in the business
  • Government Compliance & Compliance with Laws: audit for completeness of compliance
  • Property: review of all real estate, leases, land, etc.
  • Operations or Production Issues: evaluate workflows, key vendors, processes, etc.
  • Marketing: review marketing strategy, vendors, channels, etc.
  • Competitive landscape: review company’s market share and industry landscape
  • Online Data Room: secure, shared, cloud-based storage of all due diligence files to ensure all parties can access and review
  • Disclosure Schedule: Seller’s schedule identifying any exceptions to the company’s representations and warranties or diligence disclosures.

As you can see, this is an extensive list, requiring many, many hours of preparation. Get started as far in advance of a transaction as possible, as it will cut down costs and speed time to close. It also protects transaction value – if a buyer is unclear or has any doubts over key strategic areas of cash flow and value, it will likely lower the amount they’re willing to pay, or they may walk away all together.

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