If you are looking to buy a company, an essential part of the purchase process is due diligence. This "book review" shows how a company is really doing.
The findings from due diligence directly affect the purchase price and other important issues in the deal. The added value of due diligence lies in the findings that are not immediately visible to you, but have a major impact on the final purchase price.
In-depth due diligence before negotiation
During due diligence, all major components of the business are thoroughly analyzed. Think of financial, fiscal, personnel and legal aspects. The scope of the investigation depends on the size and complexity of the company.
For the buyer, due diligence offers security above all: you want to know exactly what you are buying and what risks are involved. But it also helps the seller to create realistic expectations and avoid discussions afterwards. Due diligence is more than an audit; it forms the basis for well-founded decision-making and negotiations.
No big surprises, but price-determining findings
Due diligence is an important part of the purchase process for good reason. After all, the goal as a buyer is to find out all the issues relevant to the transaction. Usually the buyer uses the results to hedge risks in the purchase agreement, for example by including indemnities. In addition, the investigation may affect the purchase price, for example, if historical figures, normalizations or other components of the purchase price, such as cash, debt and net working capital adjustments, turn out to be different than previously presented.
In the worst case, a transaction does not go through, but that is rare. In practice, we see that transactions do not often founder on one major finding from the due diligence. It is precisely because of a stack of smaller findings that can be overlooked individually, but together do affect the value of the company (and thus the purchase price) and post-acquisition risks, that discussions often arise.
Small corrections that affect the purchase price
A typical example of a small finding with big impact is in the normalizations applied. In a sale, figures are often "cleaned up" to show the structural result. In the due diligence investigation, we test whether this is justified. In practice, costs regularly turn out to be labeled as one-offs, while they are actually recurring. Think of digitization costs that continue in licenses after implementation, or bonuses to staff or management fees that are structurally higher than previously assumed or will apply after acquisition.
By themselves, these seem like limited corrections. But because de ondernemingswaarde is often determined on the basis of a multiple of earnings, any adjustment affects the purchase price. A €40,000 adjustment to earnings can make as much as €200,000 difference at a multiple of five. So it is precisely these findings from due diligence that can significantly affect the value of a deal.
Successful deal
Due diligence is not required by law, but it is crucial in practice. As a buyer, you have a duty to investigate; as a seller, you have a duty to provide information. Anyone who fails to do so runs legal and financial risks. A carefully conducted due diligence investigation prevents discussions that only arise after closing and helps to make sound agreements in advance.
