Financial due diligence
Financial due diligence is a term used when businesses are acquired but applies to sales of businesses as well.
Financial due diligence is the process of checking out the business to see where any problems may lie. It is like ‘kicking the tyres’ when buying a used car but it is more than that where a business is being acquired.
Purchasers will benefit from a due diligence exercise by knowing about the pitfalls of the business and how these might affect the purchase price. They can then limit their risk by requesting the appropriate indemnities and warranties.
A vendor can also carry out a due diligence exercise on their business to ascertain where issues might be prior to the sale which may affect the value they receive. The report will give them an opportunity to put their business into a state the buyer will understand before the sale of the business is started.
Buyers of businesses, including the managers, will usually need to carry out the process and the lenders may require it if money is borrowed to fund the purchase.