Due Diligence - The Basics

Due Diligence is the period when you will be able to access the company's books and records to verify that all of the information that you have been told thus far is true and accurate. Most often, people unwisely believe that Due diligence is simply the time to verify the financial position of the company. While this is true to some extent, a proper and effective Due Diligence goes past the financials.

The Right Approach To Due Diligence

Is this the time to look for things that are wrong with the business? Is this the time to strictly verify numbers? Is this the time to disprove what you have been told by the entrepreneur? While each of these approaches is somewhat valid none are absolute. You will want to employ a part of each of these strategies but an effective Due Diligence is when you can really "check things out". Use this period to determine whether the future looks bright for the business and the industry. To do so, you must investigate far more than the financial aspect. Sure, the various financial statements will give you a picture of the past and perhaps a glimpse of the future but the past is over and done with. You must thoroughly review the company's sales, marketing, employees, contracts, customers, competition, systems, suppliers, and legal and corporate issues. You want to complete the Due diligence period knowing exactly what you are getting into, what needs to be fixed, what the costs are to fix them and if you are the right person to be at the helm to put the plans in place to make a great future for the business.

How Long Do You Need

Every entrepreneur will try to negotiate the shortest Due Diligence period possible. It is impossible to truly get a feel for a business in a short time. You need at least 30 days (20 working days) for even the smallest of companies. Since a proper investigation reaches farther than just financials you must allow yourself adequate time to accumulate the information. This strategy lends itself to wondering how to get the entrepreneur to agree to this time frame. It's actually quite easy; let them know exactly what it is that you will be investigating. Tell them that you do not want to back out of the deal and if they truly want to move forward with it they must allow you the time to do the proper investigation.


Your preparation must begin the moment you believe that the business may be worth pursuing. After you meet the owner the first time and believe that you may be interested you should begin to organize your plan. No matter how early you are in negotiations, at least start think of what you need to do. Start lists and note areas and specific details related to the business that need further review. Once you get closer to a deal keep detailed "to do" lists, broken down by each sector of the business (i.e. Financials, Employees, Sales, Contracts, etc.). Keep your accountant informed of when you anticipate beginning the Due Diligence. Assemble lists of the materials you will need from the company and never begin the Due Diligence until you have received all of the supporting documents that you will need from the entrepreneur.

Should You Hire An Accountant To Help You?

Without question you should use an accountant for this. Even if you are an expert in this area, get an accountant to run the numbers and verify all of the financial activity. There is so much more that has to be investigated that your time is best spent on these areas and you would better hire a professional to help with the financials.

Getting The Entrepreneur and Their Staff To Cooperate

The entrepreneur must let his people know that they are to provide you with full access to all files and complete cooperation throughout your investigation. That's your job. If there is anything that they do not want you to see, then tell them to remove it from the premises.

What If You Find Surprises?

This should probably be titled: "What to do "WHEN" you find surprises" because you will. If you don't, you haven't looked hard enough. Deal with each on it's own and make sure that you thoroughly investigate each so that your facts are bulletproof. However, don't get bogged down with minor issues and you are best to take these as "part of the package". Unless you find something that cannot be resolved or is so detrimental that even if the seller lowered the price by 50% you would still have to walk away you are best to take all of these obstacles in stride. Don't publicize them; investigate them. A few issues doesn't mean that the business is bad. You must weigh them impact against the future viability of the business. Remember your goal is to learn what it is you will be getting into and what the future can be with you in charge. The option always exists for you to renegotiate once your investigation is completed. You will be in a much stronger position if you can go to the entrepreneur with very specific concerns, which require reevaluation and renegotiation. With this in mind, do not discuss your findings with anyone except your accountant or other advisors.

Source: startinbusiness.co.uk


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