Buying a business?
Due diligence is vital, because it helps the buyer verify financials, review the quality of earnings and ensure the company’s past and potential opportunity for growth aligns with what the buyer believed it to be at the letter of intent. The buyer is looking for any information pertaining to possible liabilities that they could potentially assume upon purchase and these can alter the value placed on the business which might need to be dealt with before closing.
Buyers will also analyze opportunities for future revenue to ensure the value they have placed on the company’s potential earnings is accurate. Some acquirers will also gather insight to help ensure that the company’s operations, people and processes would provide a good culture fit for their organization
Selling your Business?
The due diligence process is important to sellers, because it equips them with the information necessary to determine a realistic valuation for their business, and potentially avoid leaving money on the table. Sellers should perform their own internal due diligence process prior to opening their books to buyers. It’s especially important at this time to uncover and fix any unresolved legal, tax or regulatory issues that could complicate, delay or sink a potential sale.
If there are any outstanding concerns, the seller should consult with their investment banker regarding when and how to present these issues to the buyer. Sellers should be upfront with buyers early on and avoid hiding problems, because surprising a buyer during the due diligence process is never a good idea.