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What is Due Diligence?

Buyer Beware

Due diligence is the term used to describe the investigations made by a buyer before he enters into a contract to purchase a company.  It is similar to the survey completed by a mortgage company before they lend against a house – only far more complicated.  It usually happens immediately after the seller accepts an offer.

Due diligence is the buyer’s opportunity to make sure everything they have been told about the company is true, and that there will be no nasty surprises after the purchase is completed.  It is a thorough investigation of the company’s financial, commercial and operational circumstances.

For a small company due diligence may be little more than an audit of the seller’s books and detailed discussions about customers and products.  For a bigger company the seller might involve 20-30 people, its own employees and outside experts, in a thorough review of the company.

The most important areas of due diligence are:

Commercial Due Diligence: a thorough review of customers and products, but also looking at the strengths of the management team and competitive changes in the industry.

Financial Due Diligence: a review of financial and tax affairs, not only profitability but also a through review of stocks, trade debtors, creditors and other liabilities.

Legal Due Diligence: will focus not only on making sure that the company operates within the law, but also checking that it really owns all the assets shown in the balance sheet and is not involved in any disadvantageous contracts.

For bigger companies a detailed review of information technology, environmental and other regulatory areas should be expected.


If you are interested in finding out more about these and other issues relating to the sale of a private company one of our business sale experts would be delighted to talk to you in complete confidentiality. Click CONTACT ME to book an initial phone conversation or call us on 01604 432964.

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