Before you start work on due diligence, make sure the deal is agreed in principle. A purchaser should seek buy-in from shareholders and confirmation that all are on board. An understanding on price and who will give warranties is crucial.
Make sure that all parties have signed a protective confidentiality agreement. Always obtain full legal and tax advice at an early stage, as key issues, such as how to deal with or consult employees, how to address key customers, and how to manage any press or leaks about the proposed plans, need to be addressed before the process starts.
The precise scope of due diligence will vary, but it could include any or all of the following areas.
- Examine the target company’s accounting policies and decide whether they are reasonable for the industry in which it operates.
- Look at the accounts for “exceptional items” that may have distorted value.
- Determine whether there are contingent liabilities that could affect future value.