Due Diligence entails a process of inspection, examination and verification. It is a presale activity. It is often done by a buyer who is interested in completing a M&A type acquisition of a business or property. It is put into action once a letter of intent or expression of interest is signed between a potential seller and a potential buyer.
The due diligence process is carried out on the back of a confidentiality and non-disclosure agreement and is one of the key features in an M&A deal.
Normally, the buyer sends out a request to see or receive copies of a long list of documents. There is no limit on the buyer to ask for any specific document or types of documents. The buyer can technically ask for any information it may please.
Once all documents are provided, the next stage is having a set of follow up questions from the buyer. The seller or its advisers are constantly asked to explain certain documents, provide some missing information, some supporting documents, some documents of evidentiary value, or fill in some gaps.
Whatever the length of the list of documents requested by the buyer, they mostly relate to key functions of the business, like legal and compliance, financial and tax, strategic and operational, HR and procurement.
This is a process where the seller is held accountable to the truth of all statements made to induce the buyer about the value of the business, or the offer made to sell the business. It is the process where each and every representation made by the seller is verified. It is where the business is dismantled by piece by piece to understand what it is made up of, how it is managed, what its risks and threat factors are like. It is also the process whereby the buyer tries to avoid any surprises later in the transaction.
Even in the sale of a straightforward business, the process may take a few weeks to complete. In some complicated transactions, it may take months.
However painful this may be to the seller, the process of due diligence is seen to be a necessary evil in an acquisition process. The findings of a due diligence process may affect the sale price positively or negatively.