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Understanding Due Diligence

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Selling a business
By
Lucas Couper
Lucas Couper
Director
January 6, 2020
4
minute read

Understanding the questions buyers will ask of your business

During the sale of a business, information is presented to prospective buyers in the form of an Information Memorandum and Financial Model. Due Diligence is the process of allowing these buyers to verify the information and delve deeper into the workings of the business for sale.

If you're looking to sell your business and want to learn more about due diligence, get in touch with Nash Advisory. Our expert team can guide you through the sales process, leading you to the best outcome for the sale of your business.

Why do businesses perform due diligence?

When buying a business, the onus falls upon the prospective buyer to examine the business in detail, and to verify all information that has been provided by the seller. It is the best way for buyers to:

  • Access important confidential information about the business
  • Accurately assess the value of the business
  • Determine the risks of buying the business
  • Ask any questions related to the business

A thorough due diligence process will provide the prospective buyer with an accurate summation of all relevant information related to the sale of the business.

What do buyers investigate during due diligence?

Buyers should conduct a thorough and exhaustive review of many different facets of the business they are considering buying. Due diligence should always include a review of the following:

  • Account records, cash deposit records and payment records
  • Profit and loss records, income statements, balance sheets and tax returns
  • Utility accounts, lines of credit, and bank loans
  • Intellectual property, trademarks, and patents
  • Existing contracts, lease agreements, and partnership agreements
  • Plant, equipment, vehicle, and fixture details
  • Any other avenues of investigation that are relevant to the seller

Buyers should also conduct a top level investigation of the business's reputation, and why the owners have decided to sell.

For a full summary of what you as a seller can expect to be asked to divulge during due diligence, get in touch with Nash Advisory.

When does due diligence begin?

Due diligence generally begins when a Non-Binding Indicative Offer (NBIO) has been presented to the seller, which details:

  • The valuation of the business
  • The key assumptions made in making an offer for the business

Bidders who have submitted an acceptable NBIO are normally granted a period of approximately 4 weeks to conduct their diligence. This timeframe may be extended if the deal is large and complex. Documents are usually presented to prospective buyers via a data room. This ensures easy access and allows the data to be analysed by multiple parties.

All due diligence information should be ready and available for the buyer the moment both parties have signed the Non-Binding Indicative Offer (NBIO).

What areas of business does Due Diligence cover?

inspecting a business for due diligence

The typical areas of focus in due diligence include, however are not limited to:

  1. Accounting and Financial Due Diligence
  2. Commercial and Operational Diligence
  3. Executive Alignment and Reporting
  4. Tax Diligence
  5. IT Diligence
  6. Human Resource Diligence
  7. Transaction Support

It is common for larger buyers to engage experts to perform due diligence, for example an accounting firm to perform the accounting due diligence, and a legal firm to perform the legal due diligence.

These entities analyse the supporting material provided and probe the information. It is not unusual for up to 400 queries to be received per buyer throughout the diligence process.

What are the costs of performing due diligence?

The costs of a due diligence process for the buyer largely depend on the scope and duration of effort, which depends heavily on the complexity of the target company.

Why does due diligence matter?

If the assumptions presented throughout the sale process — that form the basis of the buyers offer the business (NBIO) — are found to be inconsistent through due diligence, then the price offered for the business can be altered when the final binding offer for the business is made.

It is for this reason, that it is essential that information and data presented in the Information Memorandum and Financial Model are accurate and represent the business in a clear and articulate manner.

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