Due Diligence

Due diligence is the careful review of a company before an acquisition. Buyers examine finances, contracts, legal matters, taxes, and other areas to identify risks and opportunities. The results feed into the price, the contract, and the decision on whether the deal happens at all.

Several workstreams normally run in parallel: financial diligence analysing quality of earnings and working capital, legal diligence covering corporate matters, contracts, employment and litigation, tax diligence, commercial diligence on market and competition, and, depending on the business, technical, IT, environmental, human resources and sustainability reviews. Scope depends on deal size and risk profile and ranges from a brief review of selected key questions to a full investigation by several advisory teams over weeks. The findings have three possible consequences: an adjustment to the price, contractual protection through warranties, indemnities, holdbacks or conditions precedent, or, in serious cases, abandonment.

The effect of disclosed matters on warranty claims depends on the purchase agreement. Identified risks may therefore require a price adjustment or specific indemnities. Conversely, forgoing diligence can create liability for a buyer's directors. Vendor due diligence, where the seller commissions the review in advance and makes it available to bidders, is also common. A risk-based approach is advisable for managing cost, defining depth of work and materiality thresholds in advance and starting with the areas contributing most value. Spreading effort evenly generates cost without additional insight. Coordination between advisors also needs settling, because findings in one area regularly raise questions in another, for instance where a tax point calls the chosen acquisition structure into question.