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What is due diligence?
Due diligence an integral part of the sales process when a business transaction is nearing completion. But what due diligence is due diligence , and what does it entail for the buyer and seller? Ole Jensen, Business Broker, provides some insight here.
"Due diligence the buyerDue diligence a thorough insight into the company that is the subject of the transaction. This is where the buyer and their advisors are presented with confidential company data that is not otherwise shared with external parties," explains Ole Jensen.
He emphasizes that due diligence in the transaction phase, where the buyer has submitted an indicative bid for the company and the seller has accepted the bid as a starting point for negotiations.
"Before the buyer is let into the company's engine room, the buyer and the buyer's advisors have signed a confidentiality agreement and a Letter of Intent, which is a declaration of intent stating that the parties are ready to enter into final negotiations," says Ole Jensen.
due diligence process due diligence selling a business
Due diligence typically Due diligence of four areas:
- Financial due diligence
- Commercial due diligence
- Legal due diligence
- Technical and environmental due diligence
"Financial, commercial, and legal due diligence relevant for ownership changes in all types of companies. However, the parameters that are most important vary from company to company. Technical due diligence particularly relevant for manufacturing companies," explains Ole Jensen.
He elaborates on what due diligence :
"Financial due diligence typically involves presenting internal accounts, tax matters, audit reports, cash flows, and internal reporting." "Commercial due diligencetypically includes key figures for the company's customers, markets, and products. There is often overlap with areas of financial due diligence, as budgets and forecasts for the next 1-3 years are presented. "Inlegal due diligence, the buyer gains insight into contractual relationships, rights, and agreements," Ole Jensen explains.
The documents are presented in a highly controlled environment via a digital document management system, also known as a "data room", with a high level of security and a detailed log that records all actions in the system. This means that the seller can rest assured that the confidential information disclosed does not get beyond the trusted individuals.
Due diligence has a direct impact on the costs that the seller is liable to cover for the buyer if, after the transfer date, claims are made by third parties relating to the period prior to the transaction. This may, for example, concern customer complaints about delivered products. The specific obligations of the seller are often reduced by the information that the seller has already disclosed in good faith during due diligence.
Thus, the information exchange process has a positive effect for the seller of the business. The detailed wording of the transfer agreement on warranty obligations combined with the documents in the data room help to ensure that the buyer cannot subsequently make claims against the seller.
Business Brokers on due diligence
When Business Broker the seller's advisor in a sales process, Ole Jensen and his colleagues always prepare the seller early on regarding which documents should be included in due diligence.
"Right at the start of the structured sales process, we discuss with the seller what is relevant to present in due diligence. This gives the seller plenty of time to prepare," says the associate partner at Business Broker.
During due diligence itself, it is Business Brokers to handle ongoing communication with the buyer.
"Buyers typically have a number of issues they would like to have clarified during the due diligence. We ensure that the relevant questions are communicated to the seller and that the seller's answers are of the required quality," says Ole Jensen.
Good due diligence the way for a smooth change of ownership
Ole Jensen occasionally meets sellers of companies who fear due diligence because the buyer gets very close to the company during this phase, but according to the advisor, there is reason to view the process positively:
"Once you have reached the due diligence stage, you are a big step closer to selling your business, and with competent advisors, the due diligence will normally require fewer resources from management. The risk of conflicts after a completed transaction is significantly reduced when the seller's information to the buyer has been sufficiently transparent."
Gain insight into the negotiation phase of selling a business.
