Chapter 09
Due diligence
Due diligence is a structured search for the difference between what was represented and what is there. Well run, it confirms a deal. Badly run, it becomes an open-ended fishing trip.
The areas
- Financial. Reconciling reported results to bank statements and platform data, testing normalisation, checking working capital.
- Commercial. Concentration in customers, suppliers and channels; margin per product group; the trend behind the totals.
- Legal. Ownership of domains and trademarks, contract transferability, employment matters, disputes.
- Technical. Platform, hosting, integrations, code ownership, security and data handling.
- Marketing. Traffic sources, dependence on paid channels, the state of search visibility and the history of the accounts.
Scope and time
An investigation with a defined scope and a fixed end date produces answers. One without either produces new questions each week, and a seller who slowly loses patience and negotiating position.
The scope belongs in the term sheet. Its limits are as important as its content.
What findings do
Most findings do not end a transaction; they move a term. A supplier contract that cannot be transferred becomes a condition. Overstated normalisation becomes a lower figure. An undocumented process becomes a longer handover.
Findings that do end transactions tend to share one trait: they suggest the information given earlier was not reliable. Accuracy is worth more than presentation, at every stage.
The seller's own investigation
Sellers increasingly commission a scan of their own business before going to market. It surfaces the same issues earlier, when there is time to fix them and no counterparty is watching.
It also shortens the buyer's work, which shortens the period during which a deal can fall apart.
- What a due diligence investigation covers (https://www.businessforsale.eu/knowledge-base/due-diligence)
- Business scans commissioned before going to market (https://www.businessforsale.eu/services/due-diligence)