Due diligence is a comprehensive appraisal of a business undertaken by a prospective buyer to establish its assets and liabilities and to evaluate its commercial potential.
There are 2 basic types of Due Diligence:
- Hard Due Diligence which is performed by studying costs, benefits, structures, assets and liabilities. It is everything that can be seen on paper about a company;
- Soft Due Diligence is the study of the management style, office culture and any other human elements that may be involved in the business.
Most prospective buyers only focus on Hard Due Diligence. By ignoring Soft Due Diligence, the prospective buyer cannot measure whether the current employees will be able to cope with the change in management style. These employees may resent the change and may not be able to work as they previously did.
Hard and Soft Due Diligence intertwines when it comes to incentive and compensation programs.
Types of Due Diligence:
- Administrative DD
- Financial DD
- Asset DD
- Taxes DD
- Legal DD
- Intellectual Property DD
- Human Resources DD
- Environmental DD
- Customer DD
Other areas of Due Diligence research include: IT networks, research and development, sales and marketing, issues with stock and/ bonds, etc.
When conducing Due Diligence, it is important to take every piece of information into account if this is not done it can cause major loss once the merger has been completed.
Here are some things to consider:
- Are the business values similar or of equal importance?
- Are there key personnel on each side that can make the merger easier?
- Does the company have personnel that represent a substantial gain in human resources?
- Are the assets, losses operational and financial synergies beneficial to the company?
- Do they have important technology, market access, products/services that would benefit or can be profitable to the company?
Biggest warning signs for the buyer
- Any information that they do not disclose or refuse to do so (their reason for selling, staff contracts, licenses and permits, financial information etc.);
- Refusal to agree to a trial period or an unreasonable amount of time in which Due diligence must be conducted (at least 30 days);
- Refusal to introduce any suppliers, landlords etc;
- Involved in any legal proceedings;
- If they have a questionable credit record and or history;
- If they are too eager to close the deal quickly.
If you would like to know more in depth about Due diligence, please read our previous blog posts:
- What is Due Diligence?
- Due Diligence: The devil is in the detail;
- Types of Due Diligence;
- Here is how to stop your business from falling apart due to Due Diligence;
- Conducting Due Diligence.
Or feel free to take our quiz on Due diligence.
If you would like any further information or would like to conduct such an investigation, please feel free to contact Uphando Forensic and HR Service and we will gladly assist.