What is Due Diligence?
Due diligence is the process of examining the business details and data when buying a business
. It's similar to inspecting a home before closing on the house. A buyer will want to check, to name a few things, the financial health of the company, the quality of the standard operating procedures, manuals, policies, tax, legal, and other liabilities. The buyer gets this information by requesting it from the seller. In addition, the seller can get information from third parties such as a tax clearance from the state, to see if or what outstanding taxes the seller has, and liens on any equipment.
Why is Due Diligence Important?
The most obvious reason why the due diligence process is important is that the buyer gets to see what he or she is really buying. A buyer shouldn't take the seller's word about the value of the business. Another less obvious reason is that if the seller lies to the buyer about anything regarding the seller's company, the buyer will have no leg to stand on in court because the court will note that the buyer did not bother taking measure to prevent being a victim of fraud. (I published a whole article on this topic
). Lastly, due diligence is important because it forms the basis of the purchase agreement. For example, if, during due diligence, the seller's equipment was required to be ...