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A Guide to Understanding Commercial Due Diligence

Undergoing 'due diligence' can be a horrific experience if you are unprepared, but with the right preparation it can go smoothly with minimal disruption.

'Due diligence' is usually carried out on a company when an investor or another company is seriously interested in investing in or merging with your business. They need to be sure that all of the claims they have read in the business plan, seen in presentations and the answers they have received to their queries over the past weeks or months are actually true. It is a form of protection for them but can be a harrowing experience for you. If your claims are true, it should mean that you are now very close to receiving the investment and assistance that you require.

Consultants are sent in to 'dig' within the business. They are primarily there to ascertain the value of the business and its ability to meet the requirements set by you and the investors or potential joint venture partners. Senior staff will be quizzed relentlessly about every single aspect of the business. A good consultant will also make it his or her job to find out the 'truth' from other members of staff. They are not looking to catch you out, but to ensure that the business objectives are understood from the top down. Casual conversations with junior or part-time staff can reveal an awful lot about the true working practices and morale of the staff.

The reality of the situation is that every number, claim, projection and line entry you have ever committed to paper of computer file will be scrutinised and absolutely nothing will be taken as fact unless there is some supporting evidence.

HOW TO PREPARE FOR THE ONSLAUGHT

It is imperative that you file, back-up and can put your hands on absolutely everything, especially financial records, no matter how old. There can be no excuses as to why documents are missing, corrupt or only partially complete. Organise your files before the assessors arrive, not when they are in the building. You will only be asked for the information, and, as the people sent in will probably be charging by the hour or by the day (and you will foot the bill), it is in your financial interest to ensure that documentation can be found quickly and easily. Don't forget that it will help in the assessors' report if they comment on how professional and organised the company is. Treat your assessors with respect, but don't grovel. They are paid professionals doing a job and they should be left in peace to do it. As you are paying, you want value for money no matter how antagonistic some of the questioning might be.

The assessors will speak not only with you. No matter what your reasons are for 'protecting' other members of staff from being grilled, they will be asked some delving questions and if you appear to be interfering with their answers, you will be asked to leave. Ensure that all of the staff are briefed well in advance if you can - you are all on show and if your staff aren't prepared, or don't take the procedure seriously, it can and will have a detrimental effect on the assessor's report.

It may seem a bit odd, given that the reason you have probably approached a large investor is to raise funds, that due diligence costs you a significant amount of money, but it does. More often than not, especially if you are dealing with venture capital firms, the cost associated with sending in a team of chartered accountants is met by you, on the understanding that if the investment goes ahead that money will come back. The only problem is that if the deal falls through, for whatever reason, you are left with a huge bill.


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