What Is Due Diligence in Business Sales? | KBS Corporate

What is due diligence?

Throughout due diligence, a business buyer will have the opportunity to investigate the target company and confirm assumptions they have made about its financial and operational position. Due diligence is a comprehensive process that involves a thorough examination of a business’s legal structure, ensuring the seller has provided an accurate representation of the company.

What is being checked with due diligence?

A seller will be presented with many legal due diligence enquiries that will allow a buyer to gather information. Common requests and questionnaires will focus on the financial and legal aspects of the business, ensuring certifications, insurance, employee contracts and client relationships are all in order. Additional considerations include sector analysis and competitor research.

What is the purpose of due diligence?

Ultimately, the buyer will want to know whether the business is worth what they are going to be paying. Due diligence is a comprehensive investigation that will be completed before a buyer signs a contract.

Is due diligence necessary?

Whilst due diligence can be a legal requirement, the majority of the process will comprise voluntary checks. However, it is unlikely you will engage with a buyer who does not want to conduct due diligence. A seller should strive to complete their own due diligence before a sale to facilitate a smooth process when entering negotiations with a buyer.

Due diligence is always to be expected during mergers, acquisitions, when working with business partners and prior to international transactions.

Understanding due diligence

Hard due diligence

Hard due diligence encompasses the evaluation of concrete data that is, typically, easily obtainable. This is a common process that consists of a fundamental analysis of financial statements, including balance sheets, projections and income statements. Additional factors include reviewing ongoing litigation and subcontractor relationships. Hard due diligence is driven by mathematics and legalities.

Soft due diligence

Soft due diligence is a process primarily concerned with the existing management structure and the people within the company, as well as the business’s customer base. The success of many businesses cannot be measured by numbers and soft due diligence acts as a counterbalance to hard due diligence to ensure the human element is not ignored.

Enhanced due diligence (EDD)

Enhanced due diligence (EDD) facilitates a greater level of scrutiny when investigating businesses that are subject to financial regulations or supervised by the Financial Conduct Authority (FCA), as well as businesses situated in high-risk countries or employing politically exposed persons (PEPs).

Factors leading to EDD include:

  • Higher-risk countries and business sectors
  • Complex or opaque beneficial ownership structures
  • Unusual transactions that lack an obvious economic or lawful purpose

Business partner screening

Business partner screening is an investigation focusing on businesses and individuals that identifies legal, financial or ethical red flags. The primary objective is to highlight details of a potential business partner’s background and develop a third-party profile. This process is conducted when entering into a new relationship or signing a partnership contract.

Due diligence statement

When providing documentation and supplementary materials to facilitate the buyer’s investigation, sellers will produce a due diligence statement. This document provides an overview of all materials used during the due diligence process, confirming that a seller has prepared all relevant materials to the best of their knowledge.

A Due Diligence Statement typically includes identification procedures, sanction list checks and risk assessments.

A checklist for due diligence

During due diligence, buyers will be looking to investigate the following:

  • Finances — All financial aspects of the business will be reviewed, including company accounts, annual reports, expenses and payroll.
  • Legal — The legal structure of the business will be analysed, covering insurance policies, regulatory compliance, supplier contracts and tax returns.
  • Operations — Buyers will want to understand how the business operates, looking at sales processes, products and services, and marketing activity.
  • Assets — Sellers will offer an overview of the business’s assets, such as property and equipment owned, fixed and variable assets, and intellectual property rights.
  • Employees — Employee data will be reviewed, including contracts, structure, salaries and subcontractor relationships.

Expert due diligence with KBS Corporate

At the core of the due diligence process, the buyer wants to confirm that there are no unexpected skeletons in the closet. KBS Corporate will help you prepare a due diligence report that highlights any key areas of concern and ensure you have contractual protection when proceeding into the legal process.

Due diligence requires experience, trust and confidentiality, and our team has the skills needed to work through the process as efficiently as possible.

If you would like to discuss the due diligence process further or have any concerns, please do not hesitate to get in touch with our sales team.

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