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Due diligence

CVW Accounting - what is due diligence?

What is due diligence?

Due diligence is when an investigation is carried out into aspects of a company, in preparation for sale of the business.

These due diligence investigations are carried out by owners or management of the interested business and more often than not a third party of financial and/or legal advisers are involved in the process.

Proactive owners carry out their own due diligence investigation to assist with the sale process.

The process can be overwhelming and time consuming however there are guides and advice available online and the CVW Accounting team can also help with questions.

If purchasing a business or looking to sell your business here is useful information about what due diligence involves, questions to ask and points to consider.

Why due diligence is valuable?

A due diligence investigation provides a detailed picture of the business. This information means you are well-equipped to make an informed decision about the purchase, the value of the business, your risk and what investment of time and or funds may be required in the future.

The information gathered during a due diligence investigation is confidential. The seller will request signatures on a non-disclosure agreement before releasing information.

Business owners selling their business, carrying out your own due diligence prior to sale to ensure the best possible outcome.

A thorough seller-investigation provides an accurate value of the business. This will assist with negotiations, buyer questions, reactions and will confirming all appropriate and necessary documentation is available.

What does due diligence involve?

A due diligence investigation looks closely at all aspects of the business for sale. This includes business operations, financial performance, legal and tax compliance, customer contracts, intellectual property and assets.

Common categories of due diligence include:

  • Business information – formation / incorporation documents; bylaws or operating agreements; agreements between owners of the equity interests; up-to-date board minutes; notices for equity owner and board meetings; ledgers; equity certificates
  • Financial records – balance sheets; income statements; annual reports; audit reports
  • Contract details – customer contracts; supply agreements; loan and other financing agreements; insurance policies; employment contracts and consulting agreements; marketing and advertising agreements
  • Regulatory matters and litigation – permits and orders; copies of pleadings in pending litigation; copies of threatened litigation or notices of violation of any laws
  • Employment and staff matters – information regarding employees, wages, benefit plans, bonus compensation, vacation, sick time, and any benefits and policies
  • Intellectual property – documentation supporting any copyrights, trademarks, trade names, or patents owned by the selling company or any of its key employees related to the business

The nitty gritty details and time it takes to produce this information can seem overwhelming. At the end of the day the outcome of this process makes a difference to your understanding of the business and your negotiating power.

If you have any questions please call CVW Accounting on 9219 1300.

References:
https://www.business.qld.gov.au/starting-business/buying-business/due-diligence-checklist
https://www.middlemarketcenter.org/expert-perspectives/selling-a-business-how-to-conduct-sell-side-due-diligence
https://www.lexology.com/library/detail.aspx?g=b2c90aed-1ece-424b-9bce-7b655e83536a

NOTE: this blog was first published in May 2017 and has since been reviewed and updated.

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