Due Diligence

Do your due diligence.

That’s something you’ve probably been told or read about as you’ve been making your way through the buying a business journey. But what does it mean and what should it achieve?

They’re interesting questions to answer and one’s we have some important insights to share.

Due diligence, with regards to buying a business, generally refers to the process of investigating the claims, facts and overall situation to uncover the truth. Its purpose is to help you decide whether the business is actually worthwhile buying.

What you might not know is that not all types of due diligence uncover the same truths. You can limit the due diligence in many ways. It might only look into:

• Tax and legal;
• The financials for the last couple of years, as opposed to the last five years; or
• It might include a customer analysis, supplier analysis and/or key dependency risk.

Generally, we’re advocates for conducting a comprehensive due diligence.

It just doesn’t make sense to have limited due diligence given the substantial dollars involved and the risks you’re taking to buy the business. That’s a key lesson we’ve seen learnt the hard way by new business owners.

Let us share a couple of brief learning experiences to emphasise our point:

1. At the beginning of a due diligence project, often you’re supplied with a detailed due diligence checklist to get a good understanding of what could be done.

   Sometimes people chose to reduce the scope to a limited financial due diligence.

   A limited financial due diligence will result in a report expressing the opinion of the financial health of the business.

   For instance, it might say that the business has been steadily getting worse over the last few years. In circumstances like that, this might make you go back to the negotiating table and perhaps reduce the purchase price accordingly.

   You would have benefited from the due diligence, but, because it was limited in scope, otherwise identifiable challenges would not have been addressed prior to the acquisition.

   For example, a limited financial due diligence would miss key customer dependency risk. Such as, the situation where a major part of the customer base had ties with the prior owner.

   This could subsequently lead to the loss of many customers shortly after the business changed owners, which naturally would have a major negative impact on revenue and bottom-line profit.

2. In this second learning experience regarding doing your due diligence, a business was acquired and for a few years, things were going pretty well for the new owners. However, unbeknown to them, they were operating against local council laws.

   What happened next was a sad struggle to keep the business afloat. Eventually the owners had to abandon the business, as the local laws make it unviable.

   Prior to buying the business, if a comprehensive due diligence had been completed, it is likely that the law breaking problems would have been uncovered.

   This would have allowed the prospective buyer the opportunity to proactively resolve such issues prior to the purchase, or directed them to buy an alternative/viable business instead.

To summarise, one must always be extremely careful when buying a business. Limiting a due diligence may be appealing in terms of being less costly and quicker, however, the long-term implications may prove very costly.

With experience, we’ve learnt to look for and find more and more otherwise hidden risks.

We are invested in wanting to assist you in buying a business that has the best chance for long-term success.

If you’re keen for this outcome, please reach out to us.