How Important Is Due Diligence?
Very. Due diligence is very important.
As an M&A firm, it is so exciting to see an offer accepted and a seller looking forward to passing the business on to a new owner. And often, this excitement pushes for the rushing of the closing process. However, even though the future of closing is thrilling, the process ahead is essential. And this process is called due diligence.
What is Due Diligence?
Due diligence’s meaning is to ‘have a measure of prudence’ or to ‘perform a prudent review’. In the context of mergers and acquisitions, this becomes a form of legal, operational, and financial review—verifying the claims and accuracy of the information provided by the seller. While this is similar to an audit, it differs by specifically focusing on the asserted information given to the buyer by the seller. Most of this information has been formed from the financial statements, so due diligence allows for the assessment of benefits, liabilities, risks, and opportunities based on these documents. Due diligence also helps recognize any potential problems or liabilities related to operations, finances, or legalities. This review then allows for the assurance of the accepted price and the claimed value of the company by the seller. Here’s a fun video I found that helps break down the concept of due diligence.
Why Does it Matter?
Due diligence matters because buying a business is no small task. When purchasing a business, there is a great deal of money and time involved. And often, before and in the negotiation phase, a buyer does not gain all of the information about the business. And sometimes, the quality of the financial information can vary. So, mainly, due diligence gives the buyer peace of mind upon purchasing a business—seeing the full picture of what they are stepping into. And from a seller’s point of view, due diligence allows them to understand the true value and integrity of their business, which is extremely important as an owner, specifically an owner that wants to sell.
What is Included?
What is included in the due diligence process can vary from business to business and from buyer to buyer. It is depended on not only what the buyer wants and needs, but also what is needed for the bank, broker, investor, lawyer, etc. But here are some of the items that are generally needed:
- Financial information and performance
- Company history and background
- Company structure and organization
- Cash flow assessment – now and future
- Legal reviews
- Company sustainability
What are Common Pitfalls?
As stated before, buying and selling a business is exciting. But that excitement can lead to some errors in the due diligence process. Some common pitfalls include:
- Shortchanging the process
- Not involving field experts
- Not assessing a company forecast and working capital assets
- Relying on unaudited information
Due diligence is easily the most time consuming and often frustrating part of a merger and acquisition. But it is an essential step. Obtaining accurate and important information about a business allows for a smooth transition without surprises.
Here at The Firm, we have a team of highly qualified advisors and a legal in-house counsel that walk our buyers and sellers through the entire due diligence process, so that the buying and selling process can remain exciting. If you would like to talk about our process, contact us here. We would love to step along side you if you are wanting to buy or sell.
For more information, check out these sources:
SecureDocs's Why Due Diligence Matters
- 4 Free Resources for Small Businesses
- Embracing the Unknown in Business
- Setting Healthy Expectations in the Workplace
- Why Effective Communication is Essential in Business
- Remote Work Here to Stay
- Learning From General Mills and Shrimp Tails
- 11 Years of Omaha Magazine’s “Best of B2B”
- Due Diligence: Preparation is Key
- Your Business as a Machine: Exit Planning Is Not Just for Exiting
- 10 Industries That Will See Post-Pandemic Profits
- Self-Care in a Pandemic
- Asset Sale vs. Stock Sale
- 5 Most Influential Women in the US
- Advertising Industry Outlook – Adapting Strategies
- 6 Best Christmas Movies of All Time
- Construction Industry Outlook – Remodeling & Renovation
- 4 Upcoming Business Trends of 2021
- Industries Booming During COVID-19
- What Are You Thankful For?
- Why it Makes Sense to Carry as a Seller
- Let's Talk About Pets
- What Exactly Are the Benefits of an SBA Loan?
- 2020 Industry Highs and Lows
- What the "Big Buyers" Want
- What’s an earnout, and why does Ryan Reynolds have one?
- M&A Advisor or Business Broker?
- How to Sell a Business in 7 Easy* Steps
- The Firm Advisors: #1 in the World -- Again!
- Documentation is Key During This Time
- Small Business Debt Relief Program
- Work On Your Small Business (While You Aren't Working In It)
- Meet the Listing: Body Shop w/ Towing & Auto Repair
- Superstitions and Deal Killers
- Choosing Your Investments: Stock Market vs. Business Purchase
- Video: Deal Education
- Industry Spotlight: Advertising and Marketing
- Meet the Team: The Firm Advisors Office Tour
- Securing Your Business Against Ransomware
- M&A: What's an M, and what's an A?
- Location, Location, Relocation
- $20M in One Month
- Pet Care: A Recession-Proof Industry
- The Firm Named to BBB Honor Roll
- Firm Family Christmas
- Firmgiving 2019
- Cortney Sells on IBBA's Podcast
- The Firm Makes Inc. 5000
- M&A: The Industry Defying Gravity
- Have You Met Makayla?
- Dr. Lemberg's Pathway to Retirement
- Steven Makes His Mark in M&A
- Hot Off the Press - June 2019 Magazine
- All Good Things Take Time
- The Firm June Magazine Release Celebration
- The Firm Feels Good Doing Good
- Corner Kick Spoils our Swan
- Opportunity of the Week: A Business That Brightens Children’s Futures
- Q&A With Cortney: Stock Sale Versus Asset Sale
- The Ins and Outs of Seller Financing
- Preparing for the Perfect Retirement
- The Firm Is Breaking Industry Records & Poised for Growth in 2019
- Simply the Best
- Competitor Analysis, Opportunities Listed
- Dentist to Dreamer - Hard Work Pays Off!
- Kansas City Tech Company Useagility Sells to First Tek
- 8th Year as Omaha's Best Business Brokerage
- Sellers: Why You Should Finance Your Buyers
- Summer Intern 2017 - Ameya Shelby
- Industry Forecast: Mind the Generational Gap
- 8 Things We Wish Every Business Buyer Knew Before Calling Us
- Selling Your Business: Getting a Proper Business Valuation
- Asset Sales or Stock Sales: Determining the Best for Your Business Transaction
- Why (and How) Business Owners Are Selling in 2017
- The Law of 3's - Choosing the Right Kind of Broker
- A Mutually Beneficial Relationship
- Reaching Out is Key
- Confidential Business Reviews
- A Change of Pace to Business Ownership
- Confidentiality is at the Core of Business
- Moving into the Boardroom
- Buying a Business vs. Starting Your Own
- Bringing Buyers and Sellers Together is Just the Beginning
- Client Interfacing in the Digital Age
- Four Questions Every Buyer Should Ask
- The Firm Outpaces Transaction Totals from Previous Two Years
- Faces of Omaha 2016: Face of Business Brokerages
- The Firm Business Brokerage Set to Double Sales within Seller's Market - MBJ 2014