Due diligence in a recession
Due diligence in a recession
Carrying out due diligence before deal completion is prudent for all business purchases at any time. In an economic downturn, however, performing due diligence is absolutely crucial.
With many solvent companies affected to a varying degree by falling customer numbers, hiked energy costs and loss of contracts in the recession, it is essential for buyers to get a full, clear picture of the firm they have their sights on before completing the deal.
There will always be an element of risk in purchasing a business, but thorough due diligence undertaken before completion can flag up anomalies that could potentially turn into big problems later on.
Legal due diligence is concerned with any documents relating to the physical property such as the mortgage, deeds and leases, as well as evidence of ownership of intellectual property.
It also found that many of the businesses questioned actually conduct their due diligence after the deal has gone through, not before.
The report stressed that it is crucial that anti-bribery and corruption due diligence commences straight away after the heads of agreement has been signed.
The earlier issues are identified, the sooner the buyer can grasp the financial and operational implications of a deal, examine any queries with a regulator or even back away if necessary.
So who carries out the due diligence? With small firms it is fairly common for the owners to take on the bulk of this task themselves, as they are likely to have the relevant experience and knowledge already. It is usual for larger companies, however, to have lawyers, specialist consultants and accountants on hand to contribute towards the whole process.
Fast growing telecoms firm Daisy went so far as installing its own due diligence team to assist in a string of acquisitions. Steve Smith, its director of M&A, brought two ex-Ernst & Young colleagues with him into the firm after he joined.
A plethora of businesses are falling into administration every month in this recession, and canny buyers are spotting plenty of opportunities to snap up.
Such deals are highly competitive and will be on the market for a very short time. Timing is of the essence once a decision has been made to pursue a distressed business opportunity. Eager buyers may regard due diligence as a long drawn out, unnecessary procedure. However it can be used to purely focus in on problematic issues.
Due diligence will determine what, if any, issues need to be addressed, what it will take to fix them in terms of resources, and of course if the company being examined is the right fit for the acquirer.
While a tendency to skip due diligence may reflect a rising pressure for business transactions to go through quickly in an uncertain, changeable. A plethora of businesses are falling into administration every month in this recession, and canny buyers are spotting plenty of opportunities to snap up. market, it is a crucial process for buyers to find out what they are getting themselves into before signing off the deal, and to avoid any problems later on.