Caveat Emptor: Importance of Due Diligence
What is Due Diligence?
Due diligence is an important process which involves conducting thorough investigations prior to entering legally binding contacts and transactions; for instance, when buying a business.
The aim of this is to enable a buyer to obtain crucial information, required to effectively assess any potential risks, and ultimately assist them in making an informed decision as to whether they wish to proceed with the transaction.
Why is Due Diligence Important?
Due diligence rests on the foundations of the Latin maxim ‘caveat emptor’ which translates to ‘let the buyer beware’. Despite no obligation for the seller to disclose defects of the business, prospective buyers can encourage this by initiating the scrupulous due diligence process.
The process is important as it not only highlights any assets and liabilities of the company but can also provide prospective buyers with a good indication as to how well the company is and has been performing. This allows them to extrapolate and predict future business prospects.
The Due Diligence Process when Buying a Business
In the broad sense, the due diligence process encapsulates blanket enquiries being sent to the seller in an effort to learn more about the business prior to purchasing. Questions fall under wide‑ranging headings such as commercial, legal and financial due diligence. These in turn extract general information relating to things like the company’s intellectual property rights, legal structure and payroll processes.
It is also important to tailor the ‘Due Diligence Questionnaire’ to include business specific questions in areas which matter to you. This helps to ensure that the seller provides relevant and appropriate information in a comprehensive manner. For example, it enables you to learn more about specific software, commercial management or perhaps employee incentive schemes.
This acquired information allows advisers to offer bespoke advice, subsequently assisting you to make informed business decisions as to whether to proceed with the transaction.
For further information about how we can assist you with this process, please see our due diligence page.