Due diligence – It's worth your attention

Article Published: 2014-12-14

The money, time and effort you spend on your due diligence before buying could save you much agony down the line...

Whether you are considering buying a business or franchise for a few thousand rand or a few millions, or whether you are considering starting up a business, a due diligence exercise will prove most useful in providing some peace of mind when you put pen to paper.

Regardless of the size of the deal and the parties involved, make sure you undertake a due diligence. My advice is to opt for the most thorough due diligence you can afford – this is money, time and effort you should spend in order to save you money, time and effort later. Also remember you get the level of service you pay for, so don't cut corners.

While researching this article I was staggered at how little information is readily available on the subject of due diligence. What is available is expensive and usually only talks to high level issues. This is worrying considering how vital a due diligence exercise is, especially for the first-time business owner.

What is due diligence?

Due diligence should be understood as an exercise to be undertaken as part of the purchase of a new business. Simply put, due diligence is an investigation into a business with the purpose of proving to the initiator of the due diligence (typically the buyer) whether the facts offered up by the other party (typically the seller) are in fact a true reflection of the business.

Who should do the due diligence?

In order to do a due diligence well you will need two key role-players:

A professional : Due diligence exercises are technical. So if you have the funds available, enlist the help of a professional who has done the exercise before. Apart from all the certificates and client references that you will get from the firm or individual you hire, check to see if the people working on your due diligence have run businesses before. The value of experiences can't be underestimated.

Yourself : Your personal involvement in the due diligence process is vital. The professionals you bring on board won't always understand precisely what your vision is for the business, what your appetite for risk is and how you would deal with problems that arise, amongst other things.

I would encourage a hands-on engagement with your team so that at the end of the day you are getting a due diligence report that will allow you to make an effective decision. You don't just want a report that says "yes, do it" or "no, don't do it".

A due diligence is not simply a synopsis of the business you want to acquire or start up. In fact, your due diligence report detailing all aspects of the investigation, can serve as a great tool for guiding your future business plans and strategies should you acquire the business.

Some finance houses and banks will offer to do due diligence for you. Be wary of this service. Be wary of any scenario where the company doing the exercise will profit from your deal beyond the fee you pay them for the due diligence.

Non-disclosure agreement

The due diligence exercise should always start with a non-disclosure agreement (NDA):

  • The NDA is signed between yourself and the seller.
  • This agreement essentially protects both parties from having their confidential business information made public.
  • A confidentiality period must be specified. Please remember that the confidentially clause does not apply to illegal activity.
  • The NDA should mention the due diligence and should specify the high level areas that the due diligence will cover.

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