Buying a Business: Conducting due diligence
In the third of a series of guides looking at how to buy a business, our Corporate Finance team offer tips and advice on conducting due diligence on a target business.
When an offer has been accepted, the prospective purchaser should be allowed access to the vendor’s accounting, taxation, commercial and legal books and records. This investigative process is known as due diligence and carrying it out as thoroughly, and reasonably, as possible enables the buyer to confirm the target is worth buying.
Due diligence will provide sound information about the target’s current and future performance. The process should also expose any problems that may need to be addressed through warranties or guarantees – or even a reduced purchase price.
Theoretically due diligence should have as wide a scope as possible. In practice, due to time and budget constraints, and a need to maintain the momentum of the purchase (and the goodwill of the seller), it will be focussed upon the risk areas of the business that could have a material effect on the target’s value to the buyer.
Traditionally, there are three areas of due diligence: financial, legal, and commercial. The latter typically examines issues such as the target’s customer base and regulatory position.
It is normal for the vendor’s business to be taken off the market during your due diligence investigations, and for any and all discussions with other potential buyers to cease. This is known as a period of exclusivity and the logic behind the seller granting it to the buyer is twofold. Firstly, a deal has been agreed in principle between the parties and, secondly, the buyer is now incurring costs to investigate the seller.
Accountants and solicitors are best placed to help you complete due diligence, although you can start the process off and obtain your own information using the Companies House WebCheck service.
At the end of the due diligence period, you should be able to form a clear view on the extent and nature (and impact on value) of any material risks in the seller. You can then assess what needs fixing, the associated costs to do this, and whether acquiring the business will add real value to your company. If you cannot tick all these boxes, you should walk away.