Due Diligence

What is Due Diligence?
Due diligence is the term used to express the process where one party attempts to find information about the business belonging to another party. It is the process allowing you to investigate the details of the business you are thinking of buying or to investigate the details of a particular situation before you enter into an agreement.

Due diligence involves doing a little homework. This homework involves checking out the business you are interested in purchasing, or the matter you may agree to.

Due diligence is the legal term professionals use, but if it is to be defined simply, it can be said that due diligence allows the person to investigate the affairs of a business they are thinking of buying. This is to see if it is the type of business they want and if it is worth the asking price.

If you want to find out everything about another business before entering into a binding contract, involving a change of ownership or some other binding arrangement, make sure you carry out this due diligence process before signing on the dotted line.

Letter of Intent and the Due Diligence Process
As the potential buyer of a business you will sign a letter of intent, which is sent to the seller. The letter of intent indicates your ongoing interest. You will then be given a specified period of time to conduct an investigation, (due diligence). This investigation involves having access to the operations of the business, as well as its documentation and paperwork.

You will also be given access to the business financial records, have approval to talk to employees, and be able to check over the facilities etc.

In other words, you can investigate fully before finalising the deal.

The order is:

  • You sign a letter of intent to purchase.
  • The seller accepts the letter.
  • The sellers allows you to conduct the due diligence of the business
  • During due diligence you have access to all information, documentation and financial records.
  • During due diligence you have the approval to look over the facilities and check out the stock, equipment, plant, systems, contracts and talk to the employees.
  • If you have any queries you can ask the seller.
  • At the end of your due diligence, you advise the seller of your final decision, which could be to continue with the purchase or cancel the deal.

Points About Due Diligence

  1. Due diligence refers to the care a person should take before entering into an agreement or transaction with another party.
  2. It is an investigation or audit of the potential investment and confirms all the material facts regarding the sale or deal.
  3. A seller can also perform a due diligence analysis on the buyer. This could involve such things as the buyer’s ability to settle the deal and any other items that could affect the business owner after the sale has been completed.
  4. All offers to purchase must be conditional on the results of the due diligence analysis.
  5. Due diligence includes reviewing all the financial records plus anything else deemed material to the sale or deal.
  6. Due diligence is a way of preventing unnecessary harm to both parties, as well as to the entity involved in that transaction.