Due diligence

In plain English

Once a price and structure have been agreed in principle, usually in heads of terms and under exclusivity, the buyer checks the business thoroughly before signing. Due diligence, often shortened to DD, is that checking process. The seller provides information, usually through a data room, and the buyer's advisors review it and ask questions.

What is examined

• Financial. Historical results, quality of earnings, normalised EBITDA, working capital, cash and debt, forecasts.
• Legal. Contracts, employment, property, intellectual property, disputes, company records and regulatory matters.
• Commercial. Clients, market position, pipeline, competition and the drivers of growth.
• Tax. Compliance, exposures and the tax consequences of the proposed structure.
• People. Leadership, key staff, incentives, culture and dependence on individuals.

Why it matters

For buyers, due diligence is how they avoid paying for something that is not there. For sellers, it is where the credibility of everything said earlier is tested. Issues found in diligence become negotiating points: price reductions, new protections, retentions or, occasionally, the end of the deal. Issues identified and explained by the seller in advance are far easier to handle.

What to watch for

• Preparation reduces the pain. Organised information, consistent numbers and contracts in order make diligence faster and keep momentum. See the preparation guide.
• Diligence takes management time at exactly the moment the business needs to keep performing. Plan for it.
• Disclosure matters. What the seller discloses during diligence generally limits what the buyer can later claim under warranties.

Transaction language and legal treatment depend on the agreement and the jurisdiction. Written by Motion Advisory Partners as general guidance, not legal advice.