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Major investment decisions such as the sale, purchase, or merger of your business are significant business decisions that have far reaching consequences.  Due diligence is a necessary element of these transactions and its primary objective is to confirm the reliability of the information, which will be used as a basis for investment decisions.

Financial due diligence and timely professional advice enhance the quality of decisions made by investors.  Potential buyers will be keen to obtain value for money in the transaction and therefore will need to gain comfort over what is actually being bought.  Are there any latent costs or risks which could arise down the road?

By carrying out due diligence, the reliability of reported results, projected earnings and cash flows can be tested and validated.  Professional financial due diligence involves the analysis of a target company’s books, records and other internal reports and documents and will result in highlighting important financial trends as well as potential risk areas.

While the length of time necessary to complete effective due diligence varies with every project, it is prudent to build it into every transaction. An effective and comprehensive due diligence process can help mitigate organisational, reputational and financial risks.

The following is a summary of the most significant legal and business due diligence activities that are connected with a typical transaction:

  • Financial Matters: This involves the examination of trends in the target’s key business indicators such as turnover, gross profit, overheads, margins, return on capital employed and performance against budget. 
  • Customers/Sales: Identification of the top customers and what revenues are generated from each of them. Is there a risk of losing customers post acquisition? Are there customer contracts or agreements in place?
  • Employee/Management Issues: Are certain employees key to the continued success of the business?  Also, there may need to be some redundancies post acquisition. Copies of employment contracts will need to be reviewed to quantify the potential severance costs. 
  • Litigation: Are there any filed or pending litigation cases. If so, can the potential cost of these be quantified in both monetary and non-monetary terms?  
  • Tax Matters: The main and primary purpose of the taxation due diligence is to identify any possible exposure to taxation liability and protect against any such exposure. It is also important to plan and structure transactions in the most tax efficient manner to maximise shareholder value. 

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