What is due diligence?

It is neither more nor less than an audit carried out by the buyer, to make sure that the information handed over is complete, and that no unpleasant surprise awaits arising from management decisions taken before the sale.

The four strands

There is no standard protocol: due diligence adapts to the size of the company and to how complex its business is. The following strands are nonetheless usually present.

• A financial audit, which examines the accounts to understand the cost structure the company carries. Among other things this establishes whether those costs will change after the sale and, if they do, what their nature and scale will be. This audit also looks at outstanding customer and supplier balances.
• An audit of assets and liabilities, to check that they genuinely reflect the situation and to project how they will develop after the handover.
• An employment audit, which reviews staff contracts and checks for anomalies liable to generate costs after the sale.
• A legal audit, which examines the company’s current commitments and any disputes.

Due diligence can also cover the commercial side: strengths and weaknesses, threats and opportunities, the skills of the staff. As a rule it always adapts to the size of the company, to what it does, and to what gives it its value.

Who can run it?

It is clearly preferable to call on specialists. It is so easy to miss something critical when you lack the experience such an exercise requires.

And if the buyer finds a problem?

Several options are open to him, starting with walking away from the deal. But most often the discovery will either affect the price, or call for specific clauses in the sale agreement.

When should it be done?

It is the final step before handing over the keys. During this phase the company reveals all its secrets. That is why it is better carried out once every term of the sale has been negotiated, once the buyer is certain of having the funds, and once the risk of the deal falling through has all but disappeared.

Specific clauses make it possible to account for any discrepancies found during the audit, without fundamentally calling into question the agreements already reached.

Advice to the seller

Most of the possible consequences of due diligence can be anticipated. That is why we recommend preparing for it while the information memorandum is being drafted: it does a great deal to make the sale process dependable.

Nady Bilani