Imagine that you are going to buy a flat but you have only been able to view it in photos. You liked what you have seen up to this point but would you really buy it based on a couple a photos? I’m sure the answer in no. Something similar happens during the process of buying/selling a company. The potential buyer only sees the “photos” that the seller wants to show him. The due diligence process is the way the buyer gets to know about the actual state of the company and whether or not these photos are “photoshopped”.
Every buyer of a company specifies knowing the company’s real situation by means of an assessment, due diligence, which encompasses not only the financial side of the business, but also the legal, work, environmental aspects etc.
Traditionally, the buyer carries out due diligence once the seller accepts their offer (subject to due diligence). Normally realised between four and eight weeks, in which period the buy/sell contract is, in a parallel fashion, negotiated.
It is worth noting that buyers usually request exclusivity if they must spend money on due diligence. Granting exclusivity is normal, but the seller maintains negotiations with a single buyer and risks final price discounts.
Once due diligence is complete, its results help verify whether the offered price is fair and justified. Buyers can use due diligence findings to negotiate price and contract terms effectively. Sellers often remain unaware of their company’s weaknesses until due diligence reveals them, weakening their negotiating position.
Sometimes, sellers need to formalize the sale urgently, proceeding to contract while requiring satisfactory due diligence results within a shorter timeframe.
Without a doubt, the due diligence process is crucial in a buy/sell operation. It is the way to come across (or not) the potential “tweaks” needed relating to the company for sale.
