Initial Due Diligence

Given that buying or selling a business might be the most important financial decision you ever make, initial due diligence is at the heart of our business brokerage services.

If you are selling, our business brokerage experts focus on maximizing your profits throughout the sales transaction, while finding a suitable buyer at the same time.

If you are buying, they will guide and provide you with opportunities matching your buying criteria. In this, we believe that financials are not the only qualifier. Rather, the business must fit your personality, lifestyle, and future exit strategy. This while ensuring  your buying price remains as low as possible.

For both of these – selling or buying a business, everything starts with the initial due diligence.

What is initial due diligence

The initial due diligence process is key to the Buyer, as this is typically conducted by independent parties and will reveal whether the financial figures stack up as provided by the Seller in the negotiation stage. The process typically includes thoroughly investigating all aspects of a business – its operations and market standing/reputation, financial performance and tax records, legal compliance and litigation history, employee arrangements, external and internal contracts, intellectual property, physical assets and other details.

Do note that while due diligence investigation is best done before the sale and purchase agreement is signed; such an agreement can also be made conditional on the satisfaction of a due diligence investigation.

Purpose/aim of initial due diligence

The due diligence process serves the following main purposes:

  • it provides a check-list of terms and conditions the parties (seller and/or buyer) may want to include in the final sale and purchase agreement
  • it show the types of documentation the parties (seller and/or buyer) should begin preparing for review by the opposing parties
  • any potential risk, downside, or problems are identified and can be factored into the final sale and purchase agreement
  • each party becomes comfortable with the past operation of the business as well as future interaction by the parties and that a successful sale transaction is likely.
  • This also gives time to both parties to verify if the proposed terms of sale agreement are acceptable

What is included in the initial due diligence

This is hard to pin down as the number of businesses up for sale may vary and the due diligence process will differ in distinct situations. Independent providers will make sure that the relevant areas are investigated and thoroughly reviewed when the initial due diligence is being carried out. Here’s a quick overview of common matters to conduct due diligence for before any M&A transaction:

  • Business’s organisation and good standing – This will include the company’s Article of Incorporation, all bylaws and all amendments thereto; company’s list of shareholders; annual reports for the last three/five years. Additionally, a schedule of all subsidiary, partnership, or joint venture relationships and obligations, with copies of all related agreements, will also be looked at.
  • Leases, employment agreements, supplier contracts, customer terms of trade and any other contractual agreements to which the company is a party; are also studied in detail.
  • Financial information and tax details – As part of financial due diligence, our experts will review audited financial statements for the last three/five years, together with the Auditor’s Reports; company’s credit report, if available; company’s general ledger; a schedule of all indebtedness and contingent liabilities; and all local and foreign income tax returns for the last three/five years.
  • Physical assets – A schedule of fixed assets and the locations thereof; all leases of equipment; a schedule of sales and purchases of major capital equipment during last three/five years.
  • Real estate details – A schedule of the Company’s business locations with their lease, rental, or purchase agreements; copies of all real estate leases, deeds, mortgages, title policies, surveys, zoning approvals, variances or use permits.
  • Environmental issues – All past environmental audits for each property leased by the company; as well as a list of environmental permits and licenses.
  • All compliance certificates relating to industry-specific regulations, health and safety requirements; as well as any pending compliance issues.
  • Litigation – A schedule of all pending litigation is also a must to review; additionally, it is advised to get a description of any threatened litigation; copies of insurance policies possibly providing coverage as to pending or threatened litigation.
  • Customer information as well as several references from high-profile customers of the company.
  • Product and service lines – A list of all existing products or services, and products or services under development.
  • Insurance coverage – A schedule of the company’s general liability, personal and real property, product liability, errors and omissions, key-man, directors and officers, worker’s compensation, and other insurance. Also, get a schedule of the company’s insurance claims history for the past three/five years.
  • A schedule of all law firms, accounting firms, consulting firms, and similar professionals engaged by the Company during the past three/five years.
  • All proprietary information possessed by the company such as any copyrights, trademarks, patents, and any other intellectual property rights.
  • Initial due diligence sometimes also involves spending time in the business observing the day-to-day systems and operating procedures. While at it, an inspection of the condition and value of the assets including the property, vehicles, equipment and machinery, is also recommended.
  • It is also recommended to get all copies and press releases relating to the Company within the past three years.

It is important to note that some of the above information may be highly sensitive. There are times where the seller may ask the buyer to sign a non-disclosure or confidentiality agreement. Our experts will also help you review any such agreement before you sign it.

What happens after the initial due diligence

If the initial due diligence doesn’t look good for the selling party, the buying party can walk away from the deal if the parties have not yet signed the sale and purchase agreement.

Even if you (the buying party) has already signed a conditional sale and purchase agreement, and are not satisfied with what the initial due diligence has shown, you can still cancel the deal without providing any explanation to the other party.

What In.Corp can do for you:

  • Legal / Litigation Due Diligence – This will include a study into the company’s Article of Incorporation, all bylaws and all amendments thereto; company’s list of shareholders; annual reports for the last three/five years; Checks on whether annual compliances are conducted and in adherence to local regulations ; vetting of company registry files and constitutional / legal documents
  • Financial and Tax Due Diligence –our experts will review audited financial statements for the last three/five years, together with the Auditor’s Reports; company’s credit report, if available; company’s general ledger; a schedule of all indebtedness and contingent liabilities; and all local and foreign income tax returns for the last three/five years; tax obligations and tax anomalies, which may include transfer pricing policies
  • Physical / Real Estate due diligence – A due diligence exercise done on the Seller’s physical and real estate assets on the balance sheet
  • Leases, employment agreements, supplier contracts, customer terms of trade and any other contractual agreements to which the company is a party; are also studied in detail.
  • All proprietary information possessed by the company such as any copyrights, trademarks, patents, and any other intellectual property rights.

Get insight into the company you’re purchasing

Through well-executed and robust due diligence, let us help you make an informed assessment of the benefits and risks involved in crucial transactions.

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