Due diligence is the process of evaluating a business situation from all aspects before making a decision to purchase.In a business purchase, it is usually performed after the intent to purchase documents has been signed but before the formal purchase agreement.
Due diligence is often performed when buying a business, but there are many other situations in which due diligence might be performed. For example, due diligence is big factor in private equity funding through venture capitalists.
Due diligence is not general investigation type but it includes specific things which may vary based on the situation. Due diligence is performed to protect both parties, but mainly the purchaser. From purchaser point of view due diligence is necessary because purchaser should not be shocked after purchase of business/company and from seller’s angle it is important because seller’s image is not tarnished once the deal has been finalized.
Examine all records and documents, as described below
- Spend time at the business location, talking to managers, executives, employees.
- Check sales against customer lists to verify that the business has the customers it says it does.
- Look at potential future plans for expansion, condition of facilities, and property, like equipment, furniture, and fixtures to verify that they are as reported
- Look at all documents which might incur liability for the company, including sales agreements, purchase agreements, liens on assets
- With the assistance of your attorney, examine documents relating to any ongoing or potential lawsuits, and recent litigation that has concluded.
- Most important in the due diligence process is to take note of discrepancies between what is reported and what is actually going on.
Although the subjects involved in the due diligence may change based on the situation, most of the time the due diligence process includes the following:
General company information:-
A history of the company, its original and any succeeding business plans, the company’s mission statement and short-term and long-term goals and objectives would be necessary here.
Company management and employees:-
Who is in charge of the company? What are their credentials? What experience do they have? Are they honest and trustworthy?
An investigation of the legal structure of the business might include viewing copies of the articles of incorporation, by-laws, minutes of meetings, and formation documents filed with the state. Other legal documents would be copies of contracts and agreements binding the company, and warranties/service agreements on company products and any product liability documents.
Products and services:-
If the company sells products, a catalog or listing of products is needed, along with information about competitiveness of these products. Brochures and price listings for products and services also must be reviewed. Pricing strategies, service availability, and terms of service are needed, Documents relating to company patents, copyrights, and trademarks must be provided, as well as licenses owned by the company and agreements with licensees.
Marketing and Competition information:-
Documents needed include the company’s marketing plan, market analysis, growth opportunities, a SWOT analysis, and purchase agreements. Information about the competition might include lists of major competitors, and analysis of the competition – present and future.
Information about customers includes review of agreements with major customers and accounts receivable aging reports.
The due diligence process includes review of fixed assets, facilities, and equipment, product quality assurance and safety, suppliers and contracts. Inventory is often taken and inventory costing (LIFO and FIFO)is considered.
Most important to the due diligence process are financial records. Records reviewed include balance sheets and income statements for past years, projected financial statements, insurance coverage, tax filings, and sources and uses of funds statements.
To conclude, due diligence means a lot………