In the business world the phrase “Don’t accept a deal until you have done your due diligence” is frequently repeated. It’s true that a failure to perform due diligence on a business and its worth can result in devastating consequences, both financially as well in terms of reputation.
A company’s due diligence process involves examining all of the information a buyer must consider in order to make an informed decision about whether or not to buy the business. Due diligence can also help identify potential risks and provides the basis for capturing value over the long term.
Financial due diligence involves looking at the accuracy of financial statements, cash flows and balance sheets, as well as the footnotes that are relevant to the target company. This involves identifying any unrecorded liabilities and hidden assets as well as overstated revenues that could affect the value of a business.
Operational due diligence, in contrast is focused on a business’s capacity to function independently of its parent company. At AaronRichards we analyze the capability of a prospective company to expand its operations, increase capacity utilization and supply chain performance, among other things.
Management and Leadership Management and Leadership aspect of due diligence as it shows how important the current owners are to the company’s success. If the business was started by a family, for instance, it’s essential to determine if there is any resentment or refusal to sell.
Valuation is a final stage of due diligence which is where investors evaluate the long term value of a company. There are several methods to evaluate this. It is crucial to choose the right method in light of factors such as the size of the business and the industry.
