Due diligence is a comprehensive assessment of a business undertaken by a prospective buyer to understand the risks and opportunities the business presents. The process involves a thorough investigation and analysis of all aspects of the business.
Due diligence enables buyers to make informed decisions, finalise deal terms, and (ideally) avoid unexpected liabilities. It’s a critical step in the M&A process and often involves a team of experts including accountants, lawyers, and industry specialists paid by the buyer. The buyer may also plan integration of the business into an existing business post-acquisition.
Think of due diligence as a deep dive into the business, involving the examination of financial records, contracts, legal documents, operational processes, customer and vendor relationships, and talking to key employees, customers, and even suppliers. Due diligence generally occurs after the parties have a Letter of Intent (or similar) in place, or have a conditional offer on the table. The buyer wants to be satisfied that there are no hidden issues or undisclosed information that could materially impact the value or risk of the acquisition. The vendor needs to balance the buyer’s need to investigate with the vendor’s ability to provide the information in a timely fashion; maintaining the confidentiality of staff and customers; and ‘handing over the keys’ of the business before the deal is done.