Due diligence is the shield for any business or person before that company or individual enters into an agreement, it’s like a certain set of standards which helps in investigation.
A common definition of due diligence is that it is the process through which a potential buyer guestimates a company he intends to acquire. Through due diligence investigation it will help a company in taking informed decisions before buying or selling any business.
Why due diligence?
Due diligence allows to establish an independent view and to go over the facts as they are and they will refer to the reasons for buying any business or they will lay bare all the facts about the pitfalls of any bargain.
Indeed, if anybody wants to buy any business he has all the rights to see the financial statements and records which are related to company’s transactions. In due diligence one can have right information before reaching any decision, and by the end of due diligence one can easily grasp the complete financial standing of the entity he wants to acquire.
Due Diligence Guidelines
Below are some guidelines or simple suggestions when pursuing due diligence process. These guidelines are not in any specific order and are not meant to be followed in the same fashion.
When going for due diligence all the concerned parties have to settled on what issues and vital information me be given for a due diligence process to be carried out. This includes but not limited to organizational structures, stakeholders, annual statements, legal information and company’s financial history.
It is always essential to go over the firm’s PLS records, balance sheet, annual reports, and cash-flow statements. If you don’t have any know-how in grasping the numbers mention in these reports then hire an audit firm to do that for you but don’t brush aside this important step.
For some countries, it is very important to get the income tax returns for the past few years (in some countries it is three years), and evaluate every business activity statement. Make sure that there is no fibbing with the figures in the statements and that their tax records match with the profit and loss statements and see that all the taxes are paid on time and nothing is overdue in this regard.
Examine the assets
After going over the documents – all sorts of – now is the time to examine plant and tools if there are any. During the inspection make sure that they are in working condition. Besides examining the financial statements also have a stock valuation before settling into any decision. It is also advisable to investigate any insurance information and make sure they have it covered until the final agreement is done.
Know the clients
Before deciding anything, analyze the scale of the prospects and suppliers. Ask to provide you the list of their key customers and clients and see if they are still active. Always investigate their current contracts and whether they are willing to bring in future business after the proposed acquisition or buying. Also verify that are there any over-dues or outstanding payments and invoices on suppliers side.
Reason behind selling
It is always good the real reason behind the selling of the company. You should try to find out why the particular owner is selling the entity. Also determine the business stability in the market and how long the owner had been in possession of that business. It is always good to ask from buyers and suppliers because they can reveal the true picture of the company and the business status.
Set the deadline
Before initiating due diligence process, always set a deadline for that, because there should be a deadline for the procedure to end in order to keep the expenses in check. Generally due diligence process takes about 2-3 weeks, so make sure that the process ends before the deadline, because in end maybe you are interested in buying but due to prolongation of the process the seller may change his mind.
It is always turned out to be beneficial to keep the due diligence data and report as it can be utilized in the long-run.