The Importance of Due Diligence Before an Acquisition
Due diligence exists to answer one question: is the business what it appeared to be when the price was agreed? Everything else is supporting detail. Buyers who keep that question in front of them tend to run tighter, faster, and more useful processes.
Sequence the work by decision value
The most decision-relevant items should be reviewed first. If earnings quality, customer concentration, or licensing would end the transaction, there is no reason to spend three weeks on lower-stakes items before testing them.
This sequencing also respects the seller's time and confidentiality, which matters in owner-operated businesses where a prolonged process can unsettle staff and customers.
The standard workstreams
Most reviews of a small operating business cover a consistent set of areas.
- Financial: quality of earnings, working capital, tax reconciliation
- Commercial: customers, pricing, competition, demand drivers
- Operational: systems, processes, capacity, equipment condition
- People: management, licensing, turnover, compensation
- Legal: contracts, disputes, insurance, regulatory compliance
Bring in advisors at the right moment
Accounting, legal, and where relevant insurance and environmental advisors are worth engaging once the transaction is likely enough to justify the cost, and early enough that their findings can still influence terms rather than merely document them.
Findings should change something
A diligence process that produces no adjustment to price, structure, transition terms, or the post-close plan probably was not a real process. Findings should either confirm the thesis, adjust the deal, or end it.
Walking away is a legitimate outcome and, in the long run, an inexpensive one relative to the alternative.
The takeaway
Run diligence to make a better decision, not to build a bigger file. Test the assumptions that would change your answer first.
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This article is part of a broader set of subject pages covering business development, business acquisitions, and real estate investing. You can also read more about Simon Leizgold.
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