Due Diligence is a detailed assessment of a company, prior to valuation and takeover by the successor.
In the context of a company transfer, Due Diligence is understood as the examination of the company in minute detail. It involves carrying out an in-depth analysis of the company, of its potential return and of the quality of its employees. In addition to the general structure of the company, the legal and tax aspects are also analyzed. The purpose of this procedure is to bring together as much information as possible relating to the company’s opportunities and risks, which facilitates the decision to buy, the determination of price and the drawing up of the contract and makes it possible to verify the legitimacy of the value of the asking price.
A Due Diligence analysis is recommended in particular in the case of takeover outside the family framework. The external buyer will not rely exclusively on the company profile produced by the seller. Instead, it will need to form its own idea of the company’s position on the market, its market shares, the competition conditions as well as the relevant legal and tax aspects.
Completion of this analysis is also in the interests of the entrepreneur transferring their business or of the seller. It makes it possible to conduct negotiations more rationally and more effectively. In addition, the structure of the transfer may, where appropriate, also be optimized for the seller, particularly from the tax point of view. Ultimately, the risks associated with liability are reduced for the seller as the buyer will have to take account of the information received in the context of the Due Diligence analysis. Contractual agreements, however, remain reserved.
Scope, time required and cost
The scope of the Due Diligence analysis largely depends on the form of transfer considered:
- In the case of an Asset Deal (when only some assets of the company are taken over), it suffices to carefully examine the values to be included in the takeover, for example installations, stocks of goods and patents.
- If, however, the plan is to take over the entirety of the company with all assets and liabilities, the Due Diligence analysis will be extended to all values and commitments, e.g. for the previous three financial years.
- Added to this are the description of the financing of the company, long-term rental contracts, leasing agreements, employment contracts etc., along with market-related data such as customer base structure, competitors and turnover.
If an in-depth Due Diligence analysis is required, the time to carry this out must be allowed. Consideration will be taken of the fact that, depending on the situation, several experts, appointed by the interested party, will collaborate on an examination of the company and that the entrepreneur handing over their business may possibly still need to obtain certain documents or have them drawn up.
Therefore, a Due Diligence analysis also entails costs. By gathering the relevant documents in good time, the person handing over the company can save time and reduce costs. All these data are often made available to advisors and experts for examination in a room provided for that purpose. This approach also contributes to reducing the risks for the seller whilst allowing the potential buyer to have all the required information.