Can you explain the purpose of due diligence?

Due diligence (DD) should be a combination of two things –

1. DD can provide an investor with comfort that they are buying what they thought they were buying – much focus is made on Financial Due Diligence to ensure that profits are accurate.

2. Also, DD should be forward looking. It should offer comfort that the market opportunity is there but it should also ensure that there is enough resource and capability in the business to take advantage of growth and opportunity.

Due diligence (DD) is an investigation or audit of a potential investment. Due diligence serves to confirm all material facts in regards to a sale.

2. Generally, due diligence refers to the care a reasonable person should take before entering into an agreement or a transaction with another party.

1. Offers to purchase an asset are usually dependent on the results of due diligence analysis. This includes reviewing all financial records plus anything else deemed material to the sale. Sellers could also perform a due diligence analysis on the buyer. Items that may be considered are the buyer's ability to purchase, as well as other items that would affect the purchased entity or the seller after the sale has been completed.

2. Due diligence is a way of preventing unnecessary harm to either party involved in a transaction.

Due diligence (DD) should be a combination of two things –

1. DD can provide an investor with comfort that they are buying what they thought they were buying – much focus is made on Financial Due Diligence to ensure that profits are accurate.
2. Also, DD should be forward looking. It should offer comfort that the market opportunity is there but it should also ensure that there is enough resource and capability in the business to take advantage of growth and opportunity.

How can due diligence add value?A good example comes from an investment we made in the leisure sector. The commercial due diligence provider conducted a sophisticated analysis of the business’s customer base through an online survey, and applied this to the provider’s databases on the makeup and demographic features of different high streets. The result was a useful tool to support Management to determine where geographically their concept may be best placed to work.

Preparation, preparation, preparation…It’s important that an information request is received by management early, before a DD provider arrives onsite, so that time and money is not wasted waiting for information to review. A bit of preparation beforehand can ensure a smoother process later on. This may mean collating financial information and key legal docs together, and briefing relevant staff about the process. The best teams recognise that a busy period lay ahead and plan and set time aside accordingly. We will always schedule in DD to ensure it happens at the most convenient time i.e. avoiding peak periods or events in the calendar like the annual audit.

Due Diligence is a shared experience.It is important that the investor and management teams work closely together throughout the exercise. This begins with scoping the work – a management team should be able to input into the process to ensure they get value from the work. It is also critical that early drafts of reports are shared as early challenges (such as questioning of recommendations and findings) will save time later.