Business due diligence

  • This article outlines why a due diligence should be undertaken in the sale and
    purchase of a business.
  • A thorough and comprehensive due diligence will assist both parties to make informed decisions about whether to transact at all.
  • This article lists common procedural aspects related to due diligence clauses in a business sale contract.

Why do a due diligence?

There are a few reasons why a due diligence is important

  • Risk assessment Conducting a successful and profitable business involves many aspects. Checking that each of the key aspects means that you satisfy yourself of the integrity and strengths/weaknesses of those aspects. In some businesses, this may simply means obtaining copies of relevant documents and reviewing it to properly evaluate the Vendor's business. In some situations, those documents may lead to more questions and indicate that a more thorough investigation is required. In some cases-the information disclosed or obtained, may result in a decision to terminate the contract.
  • Determining value Due diligence is a critical element in determining value of a business. Any factors which affect the future earnings of the company or the value of any underlying assets may have a positive or negative impact upon the price for the business. For instance, any impending litigation against the company could seriously impact upon sales and reputation and diminish the financial viability of the business. Alternatively, a projected increase in sales because of a new significant customer could mean a better profit and increased value.

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