Due diligence, or bookkeeping, is part of a business acquisition. This is because, as a buyer, you have a duty to gather as much information as possible necessary for a fair acquisition. Due diligence is not only a right, it is also a duty: it falls under duty to investigate.
An accounting review is always required in mergers and acquisitions. It usually follows after the negotiations. A buyer may include the outcome of the due diligence in the terms; an unexpected outcome will then affect the purchase. Sometimes a renegotiation is needed afterwards.
Due diligence identifies risks
Due diligence involves more than just examination of accounting records. The final report identifies the risks in a broad sense. It is also a check on the information provided by the seller of the company to be acquired.
A book examination is usually conducted by an independent chartered accountant. When acquiring smaller companies, it may also be an accountant. Which of the two parties (that is, the buyer or seller) has it performed depends on the interests.
Vendor due diligence
Usually it is the interested party who does the due diligence, or has it done by a hired party. But it is also becoming more common to do vendor due diligence: the seller then conducts a preliminary due diligence in order to speed up the acquisition process. This is common among entrepreneurs who want to sell quickly.
Duty to investigate
In most cases, however, the book research is still done on behalf of the buyer. It can be compared to buying a house: the buyer is also expected to do research. That falls under the duty to investigate.
When buying a house, for example, that includes requesting a zoning map from the municipality and having an architectural survey done. Due diligence, however, is more involved.
Confidential
In the investigation, the interested party requests data from the selling party. This often includes confidential information, such as information about personnel, but also consider pending lawsuits with customers and suppliers. Due diligence is therefore not for every interested party: it is done at an advanced stage of the acquisition process.
Confidentiality agreement in business acquisition
By the way, confidentiality comes into play much earlier in the process. When there is serious interest, it is always wise to sign a confidentiality agreement as soon as possible. On our website Loorlegal.nl you can have a standardized confidentiality agreement drawn up free of charge. You can find it here.
Doing a book audit yourself is not recommended. It involves a lot of specialized knowledge in a variety of areas. There are several specialized parties you can hire to do the due diligence. Lawyer Ernest Loor can advise you on this.
The following aspects are normally addressed in a book examination.
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Legal aspects
A business acquisition involves many legal aspects. The legal form alone is very important, because what about the corporate structure? Are certain agreements in place? Are all deeds in order?
Also consider previously mentioned pending litigation with customers, suppliers or staff. A lot can emerge from the book examination.
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Fiscal aspects
The study sheds light on the tax-legal situation. What does the acquisition of the premises mean for tax purposes? Perhaps agreements were made with the tax authorities. Have these been properly fulfilled?
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Financial aspects
Obviously, due diligence is about accounting. Then we are not just talking about turnover figures. Also consider the examination of financial statements for the past few years, loans, lease contracts and insurance. Is what the seller has communicated correct or is there still a rabbit in the top hat somewhere?
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Commercial aspects
The value of the business is sometimes fodder for debate. There are all kinds of calculations for it, so you can come to different conclusions. That's why due diligence includes commercial analysis.
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Staff
Anyone acquiring a company naturally wants to know who is working there and for how long. Due diligence asks for personnel files and the obligations that go with them.
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Environment
Due diligence may reveal that the company has caused damage to the environment. Or that the company is located on contaminated land. This can obviously affect the value.
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Criminal activities
Perhaps most importantly, does the company to be acquired participate in criminal activity, such as fraud or corruption? If there is even the slightest suspicion, it makes sense for a buyer to withdraw.
In addition, the audit reveals whether there are ties to economic crime. This is also the case if there is cooperation with dubious companies. It is better to be aware of this as a buyer.
Due diligence report
The book examination is finally summarized in a report. That report clearly shows where the risks of business acquisition lie and where the opportunities lie. It is therefore an important document for the interested party and can even be a reason to return to the negotiating table.
In short: don't underestimate due diligence. It is not only a duty, but also an opportunity to gain a complete understanding of the company you are acquiring. So tackle it carefully and engage professional guidance.
Help with a business acquisition
Call directly: 055 303 1950 or make an appointment.
About Ernest Loor
Ernest is founder of Loor Legal & Partners. He advises on contracts, mergers, acquisitions and (inter)national transactions, management buy-outs, reorganizations, restructurings and joint ventures, in short, everything an entrepreneur may have to deal with.
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Help with a business acquisition
Call directly: 055 303 1950 or make an appointment.
Free initial consultation
Attorney Ernest Loor of Loor Legal & Partners can help you with the bookkeeping process. He has years of experience in business acquisitions and knows the ropes. Call or email for a free, no-obligation initial consultation. You will then know immediately whether we can do anything for you.
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