Part 1: What do I need to know about due diligence?

When an individual or a company wants to buy someone else’s business, it will want to know everything about the business before payment is made. The due diligence process is the process where the purchaser and its team of advisers (if it has one) undertake a comprehensive review of relevant material disclosed by the vendor to investigate the operations, assets, liabilities, value, potential, and risks of the business.

Why do I need to do it?

The due diligence process is beneficial for both the purchaser and vendor.

The due diligence process will enable the purchaser to:

• accumulate sufficient information to validate the valuation of the business and justify its reasons for buying the business;
• learn more about the business and its operations;
• identify any problems and liabilities that the business has;
• identify any material risks that it will inherit once the business is purchased, whether they be commercial, legal, tax or otherwise, and to seek to mitigate those risks, including via warranty and indemnity protection under the sale documentation; and
• identify the capacity and potential of the business.

The vendor will want to cooperate in providing the due diligence material to provide the purchaser with information and help shield it from any future claims. If risks and liabilities have been properly disclosed, the purchaser cannot make claims against the vendor in the future for not knowing.

How is the due diligence process conducted?

Several years ago, the due diligence process would be conducted in a physical room. The vendor would provide all its information in hard copy in a room, and its lawyer would sit in that room and supervise while the purchaser and its lawyers went through the documents.

Nowadays many companies use an electronic data room as an electronic space to host due diligence material. An electronic data room allows parties to access due diligence material simultaneously, online, without having to visit a physical room to review the documents. As an administrator of the data room, you can set rules around who can view and who can download documents, and track access to documents, without a person having to be there to look after a physical data room.

Conclusion

For what you need to consider when making information available in the due diligence process – stay tuned for Part 2. Until then, if you need assistance with buying a new business, such as a franchise, and need assistance to carry out due diligence, contact LegalVision on 1300 544 755.