Due diligence: why is it so important?

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Due diligence: why is it so important?

Home " Buying a business " Due diligence: why is it so important?

"I have known this company for a long time." "The entrepreneur comes across as trustworthy." These are common reasons for skipping due diligence. That way you save costs and time right? The opposite is true. 

In a successful business acquisition, a thorough due diligence report is indispensable. Investigating the accuracy of the information presented by the seller is crucial to guarantee a successful business acquisition. You never know if any bodies will come out of the closet.

What is due diligence?

Due diligence literally means "due diligence. Entrepreneurs also refer to it as a book examination. This does not mean that the analysis is only financial in nature. All sorts of legal and commercial aspects also come into play.

On the one hand, it serves to identify the company's risks and opportunities; on the other, it verifies the accuracy of the information provided. In addition, it can be used to investigate issues such as intellectual property, environment, personnel and IT.

A due diligence review is a complete review of all of a company's figures, data and records, providing a clear picture of a company's current state of affairs. This way, you avoid the possibility of any bodies coming out of the closet, such as debts, pending lawsuits or contaminated land.

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How does due diligence work?

Due diligence is conducted by lawyers, tax specialists, accountants and legal experts. They consider all the information available to the company. A business acquisition lawyer can quickly identify the important risks. But due diligence is also important for the seller: any mistakes can prevent the acquisition from going through. 

Financial aspects
First, we look at financial records. These include money loans, bank guarantees, mortgage rights, liens, security deposits, credit agreements, debt instruments, leases and financial statements. The resulting analysis reveals the company's financial condition. Thus, you have the guarantee that the company is in healthy condition.

Legal issues
Due diligence also involves a variety of legal issues. You don't want to have to deal with claims, licensing problems or lawsuits in the future. It is also important to know how intellectual property is regulated and what existing agreements look like. Naturally, lawyers also look at the labor law side of the business.

In principle, when you take over a company, you always take the staff with you under the same terms of employment as they had with their old employer. Remember that the selling party is liable for the staff for up to a year after the takeover. It is therefore important to know everything about employment contracts, pension plans, collective bargaining agreements and long-term absenteeism.

Due Diligence research

Tax aspects
Tax aspects revolve around the structure of the business. Tax specialists also examine whether all matters with the tax authorities are in order. That way, you don't have to worry about additional taxes or fines. Furthermore, real estate is scrutinized.

Commercial aspects
Commercial research revolves around customer loyalty and management's view of the market. It also involves sales figures, customer base and accounts receivable position. This helps determine the competitive position and how competitive the market is.

Why is due diligence so important?

Many people considering a business acquisition in the SME sector doubt the usefulness of due diligence, but in fact you can't do without it if you are planning to make a major investment.

Negotiating position
Not only because you do not want to suffer any financial consequences afterwards, but also because it strengthens your negotiating position beforehand, a due diligence investigation is important. Moreover, it can lead to an adjustment of the agreed acquisition price if it turns out that certain matters were portrayed more positively. Think of the loss of an important customer, lagging margins, incorrectly described assets (e.g. debtors) or a misrepresentation of liabilities.

Unknown risks
You may also discover risks that could potentially lead to large costs in the future. Consider an as-yet unknown claim. If the due diligence reveals that, an indemnity can be included in the purchase agreement or a guarantee if the risk is less concrete. You will then be glad you had due diligence done so that a financial downer was avoided.

Strengths and weaknesses
In addition to an audit of the information provided by the seller, due diligence is also a way to identify the strengths and weaknesses of a company and formulate possible areas for improvement. Thus, due diligence is an analysis that sheds light on the past, reflects the state of the present and provides a glimpse into the future.

The Role of a Lawyer
Sooner or later, every business acquisition involves a lawyer. In many cases, they are not called in until negotiations have already been completed and a contract is due. Unfortunately, it frequently happens that by that time irreversible mistakes have already been made in the preparation of the acquisitions. Make sure you hire a business acquisition lawyer in time. Are you unsure if this is important to you? Contact Ernest Loor for a no-obligation intake.

What does the duty to investigate entail?

As a buying party, you have a duty of inquiry. That is, you are obliged to inform yourself about the state of the business. In contrast, the seller has a duty of disclosure. It is not permissible to withhold certain information from the buyer.

In principle, this principle outweighs the breach of the duty to investigate. In other words, if the selling party withholds relevant figures or other information, but the buyer has not done any or not enough research, then the selling party is usually at fault. Yet that is not a given.

As a buyer, you also have obligations. For example, if you don't do any due diligence at all, the judge may rule that it's your own fault if "corpses come out of the closet.

How can a business acquisition lawyer help?

When it comes to due diligence, people often think of accountants and tax specialists first, but an attorney is just as important. A crucial aspect of due diligence is the legal part.

What about intellectual property? How long do the licenses run? And are there any legal claims you didn't know about? These are all things a business acquisition lawyer can help you with. The specialized lawyers at Bedrijfsovernamehulp can also conduct the negotiations for you. If they have also been involved in the due diligence process, they are even more knowledgeable about the legal side of the business acquisition. Contact us for more information and the possibilities. 

What is due diligence?

A due diligence investigation is carried out in the event of a proposed business acquisition. With it, the seller and buyer determine what the business value is, what risks are involved, etc.

What is the importance of due diligence?

Good due diligence is a must for making a considered investment decision. Banks/investors also (almost) always make it a requirement.

Who conducts the due diligence?

In most cases, an investigation is outsourced to an independent specialist. Thus, the interests of buyer and seller are well safeguarded.

About us

As a business acquisition lawyer, we are sparring partners for buyers and sellers. On this site, we are happy to share our knowledge. 


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