The importance of due diligence when buying a business
What is commercial due diligence and what does it involve?
Here at Hartley Fowler, we offer a comprehensive range of assurance services, including commercial due diligence for customers who are pursuing a business merger or acquisition.
Are you considering expanding your business or company? Or maybe you’re keen to diversify or invest into another sector? In this article, we will discuss the importance of due diligence when buying a business…
What does ‘due diligence’ mean and what is commercial due diligence?
In the broadest sense, ‘due diligence’ is a process performed to establish facts or details of a matter under consideration. In this case, we are looking at commercial due diligence.
Specifically, commercial due diligence seeks to assess the viability and future potential of a business ahead of a merger or acquisition. It can also be deployed when considering other investment opportunities.
Due diligence involves meticulous analysis of the target company in order to ascertain whether it is a sound investment opportunity. The process also identifies anything that poses a risk to the prospective buyer/s, as well as factors which might prevent the future success or growth of the business.
Why is due diligence important?
Commercial due diligence is essential to ensuring that the acquiring party makes a sound decision when considering investing in the target business or company.
Commercial due diligence services should be provided by experienced and reputable professionals. The outcome of the process – typically in the form of a due diligence audit report – will provide the key findings and make recommendations to the investing or acquiring party.
Due diligence should provide the prospective buyer with a deeper understanding of the target company. For example, it can help to identify any potential problems that may not otherwise have been mentioned by the selling party. Potentially, if there are areas of deep concern, you can walk away from an investment.
In addition, if you do opt to continue with the purchase, commercial due diligence is a powerful way to begin negotiations – in a similar way to a structural survey, when buying a property.
If an audit reveals previously unknown liabilities in the target business, it may be used to leverage a better deal. Tangible data obtained by an impartial third party may allow you to renegotiate, perhaps with a lower bid from the valuation price, or by adding favourable or protective terms to your contract.
What does good due diligence involve?
Thorough commercial due diligence analyses the key elements of the target business or company:
- Financials: reviewing the company’s performance, with a deep dive into financial accounts, turnover, profit and cash flow, as well as any assets or liabilities
- General market: assessing the market, from its current size to projecting the potential and also identifying competition within the sector
- Customers: gaining an understanding of the client base, including their needs, preferences and consumer behaviour
- Products or services: reviewing the products or services, including uniqueness, brand awareness, quality/reputation and pricing
- Sales: analysing marketing strategy, channels and distribution network
- Integration: in certain cases, it is necessary to assess the compatibility between the prospective business and the investor or acquirer
Commercial due diligence involves gathering information from a number of sources in order to compile a comprehensive report:
- Interviews or surveys with key clients, suppliers or industry experts
- Market research – reports, databases and industry news
- Site visits and meetings with management team
- Financial modelling and projections
- SWOT analysis to identify strengths, weaknesses, opportunities and threats
Challenges of due diligence, when buying a business
Due diligence can be a complex exercise for the uninitiated. This is why it is important to appoint an experienced and reputable professional for support. Some of the typical difficulties include:
- Data availability: dealing with inaccurate, incomplete or out-of-date figures information
- Data reliability: if there has been some ‘creative accounting’ in the past
- Time constraints: it can be difficult to strike a balance between the need for thoroughness with the urgency of a potential sale
- Biases or assumptions: it is vital that subjective judgments do not cloud or bias the findings
What is a due diligence audit report?
A due diligence audit report will provide an overview of the target company’s financials. It also looks in depth at anything to do with operations and risk, from regulatory compliance to the management team.
An audit report helps the prospective investor to make an informed decision about whether to pursue the purchase. Engaging a trusted due diligence accountant means that you can rest assured, knowing that you have made an informed decision. Your acquisition will be based on accurate information about the target business.
Our commercial due diligence services
Here at Hartley Fowler, our expert team takes a professional and pragmatic approach to commercial due diligence.
As a leading provider of robust due diligence services, we pay forensic attention to detail:
- We define a clear scope for the priorities and deliverables of our work, as well as setting an accurate timeline
- We prioritise the critical issues that are essential for optimal insight
- We communicate with all stakeholders, including the target company and any external specialists who will be of benefit to the process
- We identify any risks, such as disputes, financial anomalies, litigation or compliance issues
- We compile a detailed due diligence audit report to summarise the attractiveness of the target business or company
Call the commercial due diligence experts
Hopefully this article has explained the process of due diligence and why it is necessary. Now that you’re clear on the importance of due diligence when buying a business, you might have some more specific questions relating to your particular situation.