Due Diligence: The Essential Review in Business Acquisitions

Imagine you want to purchase a company or parts of a company. You have a promising offer on the table, but can you really be sure that everything is as rosy as it first appears? This is where due diligence comes into play—the "reasonable care" that you, as a buyer, should exercise before closing the deal.

What Does the Term "Due Diligence" Mean?

The term "due diligence" originally comes from the Anglo-American legal system and literally means "reasonable care." In the context of a business acquisition, due diligence refers to the thorough examination of the target company by the prospective buyer.

The purpose of this review is to obtain a comprehensive understanding of the company’s condition. This involves not only verifying the information provided by the seller but also uncovering potential risks and issues that may not be immediately apparent.

What Aspects Are Examined?

Due diligence is a complex process that sheds light on various facets of the target company. Typically, the following areas are scrutinized:

Finance: How solid are the company’s finances? Do the figures in the balance sheets and profit and loss statements add up? Are there any hidden financial risks?
Legal: Are there legal risks, such as ongoing lawsuits or problematic contracts? Are all necessary permits and licenses in place?
Tax: Have all taxes been properly paid? Are there unresolved issues with tax authorities that could lead to additional payments?
Personnel: What is the company’s personnel structure? Are there key individuals whose departure could jeopardize the business? Are the employment contracts watertight?
Market and Strategy: What is the company’s market environment? What growth opportunities exist, and what risks arise from competitors or technological changes?

This list could be extended considerably. Depending on the industry and company, other aspects such as environmental risks, IT security, or intellectual property may also be included.

Who Conducts the Due Diligence?

Typically, the buyer commissions a team of external specialists to carry out the due diligence. This team may include auditors, tax advisors, lawyers, as well as industry experts or IT specialists.

The team is granted access to a data room where the target company provides all relevant documents and information. Over a defined period—usually several weeks—the team works through these materials, raises questions, and conducts interviews with the target company’s management.

What Happens with the Results?

At the conclusion of the due diligence process, a comprehensive report summarizes the findings. This report forms the basis for further negotiations between buyer and seller.

If due diligence reveals significant risks, this may lead to an adjustment of the purchase price or even the termination of negotiations. Conversely, thorough due diligence can strengthen the buyer’s position and increase confidence in the transaction.

Due Diligence