The sale and purchase of a company is a process that is often a once-in-a-lifetime experience for the buyer and seller involved. It is a process that demands a lot of energy and time from all parties involved and in which reason and emotion alternate as drivers in the decision making of the parties involved.
After the seller and buyer have found each other in outline and a letter of intent has been signed, an acquisition process will normally enter the due diligence phase.
Obligations of buyer and seller
With the signing of the letter of intent, parties commit to each other and commit to a careful due diligence investigation. Up to that point, information has often been shared in a limited way, because there was not yet complete "deal certainty.
The deal involves clear obligations: the buyer must thoroughly check the information provided for reliability (duty to investigate) and the seller is obliged to provide all relevant data (duty to disclose).
Purpose of due diligence
During the due diligence examination, an assessment is made of whether the information provided and additional information is correct and whether the company has fulfilled all its obligations in the past. The goal is to establish a clear risk profile: is the company financially and legally sound, or are there any identifiable risks?
This may be considered in the broadest sense of the word: are costs/benefits not in line with the market (i.e. is the EBITDA presented correct), have the correct tax principles been applied, and are remittances and remuneration around staffing as they should be?
These are some example of the topics that are investigated. Here the goal is not to possibly reproach the seller in question, but to check whether the information regarding the company is reliable and correct.
Impact of risks found
If risks or anomalies are identified, the parties should agree on how to proceed. This can range from an adjustment to the purchase price (if the financial figures presented differ) to an indemnification for identified business risks. A DD study thus enables the buyer to make an informed decision: if the risks prove too great, the transaction can be abandoned.
In practice, we still see all too often that significant risks are found during a DD investigation: from incorrectly applied VAT rates (impact of several hundreds of thousands of euros), incorrectly applied collective bargaining agreements (impact also of hundreds of thousands of euros) to non-market compliant costs/benefits.
Our DD investigations clearly identify these risks and their impact. These frequently involve issues that neither buyer nor seller was aware of beforehand. The investment in a DD study can pay for itself in several ways: by negotiating a lower purchase price or by saving a buyer from a risky investment. At best, the DD investigation confirms that the company has its affairs in excellent order.
Future of due diligence
Fortunately, we at Bol Corporate Finance see that DD investigations are being approached more and more professionally and broadly, with the goal of creating the best possible deal for both parties.
The demand for DD studies within our corporate finance department, whether as part of a purchase process or as a separate service, has increased significantly in recent years. The number of areas being investigated has also expanded considerably: whereas previously financial, fiscal and personnel items were naturally examined, IT (policy) and sustainability are now also part of the DD studies.
