The Importance of Due Diligence

The Journal (Newcastle, England), August 25, 2006 | Go to article overview

The Importance of Due Diligence


Byline: By Chris Stott

Chris Stott has helped countless clients buy a business. He explains how an investigation process is vital to every successful transaction.

The essential question to ask before buying a business is what value the acquisition is expected to deliver and whether the benefits will be sufficient to justify the cost and risks involved.

Strategic objectives sought through acquisitions often include:

* Broadening a product or customer portfolio.

* Expanding geographical reach.

* Removing a competitor.

* Building critical mass.

* Securing Intellectual Property or a key asset (e.g. land).

* Maximising synergies.

* Securing a particular management individual or team.

Once the acquirer is clear on what value is expected to be delivered they are advised to focus their attention on testing this value proposition through a robust due diligence process.

This is the investigation of a business, by an objective third party on behalf of its potential buyer. Some years ago due diligence was merely a tick box exercise but now, with the increasing prevalence of the private equity investor and more sophisticated vendors ( often with high price expectations ( due diligence is a powerful part of the process of buying a business.

The benefits of due diligence can confirm a purchaser's understanding of what they are buying and help with the development of a plan for delivering opportunities after the deal has completed. It can also help to structure the deal, for example to decide whether to buy only shares or just particular assets, what type of funding structure would be best (debt, equity or a mixture of both), whether full payment should be made on completion or whether an element should be deferred and paid only upon a future eventuality.

Fundamentally, good due diligence can bring clarity to exactly what is being bought and the associated risks and rewards. It's no surprise that due diligence has come of age as a tool for checking what a deal is capable of really delivering. …

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