Operational due diligence
The principle of ‘caveat emptor’ (buyer beware) applies to any purchase. Due diligence seeks to minimise the risks to the purchaser by systematically analysing and evaluating the target business. It will often include a review of the opportunities for restructuring.
There are many definitions of due diligence. The scope and timescale can vary widely, depending on the client’s requirements. It can take place at various stages of the acquisition process, from a preliminary ‘sighting shot’ of a target to detailed verification of data after an offer has been agreed. There are many different aspects of a company that merit investigation.
Due diligence should give a clear view of the target and what it is worth. But the amount the client is prepared to pay will depend on what it might do with the business once it has it. There are three important factors to consider:
- Major opportunities – the ways in which the business might be improved in new ownership.
- Principal downsides – internal and external factors that might affect the company’s prospects.
- Exit strategy – how (and when) the business might eventually be sold.
An objective assessment of these factors should help investors to confirm or question an initial offer price. It should also evaluate forecast performance against historical results.
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