The due diligence process: answers to frequently asked questions

Due diligence

The due diligence process is a key part of the acquisition process. When does due diligence take place? And why is due diligence so important? In this article, we answer some frequently asked questions.

What is a due diligence investigation?

A due diligence investigation is the audit of a company’s accounts that takes place during a business acquisition. As part of this process, the buyer examines, amongst other things, the financial, tax, legal and commercial position of the company they wish to acquire. During the due diligence process, it is determined whether the information provided by the company is accurate, and insight is gained into any risks and opportunities associated with the company. In this way, facts, financial information and other relevant data provided by the seller are verified with due care.

Who is involved in the due diligence process?

The buyer, the seller and their advisers are always involved in the due diligence process. The buyer and their advisers initiate the investigation into the company. The seller must provide all manner of information for this purpose. In addition to the buyer themselves, their advisers (accountants, tax specialists, solicitors and, where applicable, other specialists) are involved in carrying out the investigation. They ask the questions and investigate whether there are any issues that the buyer has not yet discovered and which could affect the acquisition or the value of the company.

Due diligence acquisition: when should due diligence be carried out?

Due diligence is the fourth step in the business acquisition process. In a due diligence acquisition, the buyer commences the investigation after signing a letter of intent, in which they express their interest in the acquisition. The initial negotiations on price and terms will have already taken place by this stage.

Why carry out due diligence?

The buyer wants to be sure that the information previously provided by the seller is accurate and that there are no so-called skeletons in the cupboard. In this way, the buyer attempts to assess the risks, which they can use in further negotiations. During the due diligence process, for example, the buyer will investigate whether the seller has paid all taxes in the past. After all, they want to avoid having to pay any outstanding tax and having the tax authorities come knocking on their door after the takeover.

What is the structure of the due diligence process?

During the due diligence process, the financial, legal and commercial aspects are analysed in detail. The financial aspect includes, amongst other things, annual accounts, profit and loss accounts, management reports, loans (debts) and other relevant financing arrangements. The legal aspect of due diligence may include Chamber of Commerce documents, (collaboration) contracts, shareholders’ agreements, as well as personnel records, licences, insurance policies and claims.

The commercial aspect mainly comprises customer contracts, marketing contracts, product developments and everything related to a company’s public communications. In short, a due diligence investigation involves a thorough examination of the company’s entire structure, and it is important that all necessary information is made available to the purchasing party. As such, due diligence can take up a considerable amount of time and effort.

Is due diligence mandatory?

Yes, the buyer is obliged to investigate the company before purchasing it. The seller has a duty of disclosure, which means they must provide (whether requested or not) all information relevant to the buyer.

Where does the due diligence take place?

As the documents are confidential, a digital data room is set up for the due diligence process. You can think of this as a secure vault, where the documents can be viewed and shared in a safe and protected environment. Once the due diligence is complete and the negotiations have concluded, all data from the digital data room will be disclosed and provided to both parties. This serves as proof that the information was in the possession of the purchasing party and that no information was withheld from them.

What data room software does BrightOrange use?

BrightOrange uses software from Virtual Vaults. This software is 100% secure and incredibly easy to use. Just like BrightOrange, Virtual Vaults prioritises the privacy of its clients above all else. Curious to know why we chose Virtual Vaults?

How does a data room work?

A data room is, as it were, an online vault, to which only the relevant individuals have the access code. Documents can be shared within this safe, and parties can ask each other questions. The great thing about Virtual Vaults’ software is that you can assign different permissions to each user. This ensures that only the relevant people can view the documents and that only a select few are authorised to ask and answer questions. You can also easily and closely monitor the process within Virtual Vaults. For example, you can see who has viewed which document.

The due diligence process is complete – what next?

The results of the due diligence are compiled into a report. This may take the form of a brief summary or a detailed report setting out the risks and opportunities that have come to light. The buyer already had a picture of the business beforehand but will now determine whether certain expectations can be met. Due diligence acquisition may therefore lead to the following actions:

• Drawing up supplementary terms and conditions;
• Adjusting the purchase price;
• Setting out specific warranties and/or indemnities;
• The sale of the company is definitively called off.

This makes the due diligence process a crucial part of the acquisition process.

Want to know more about due diligence?

In this article, we have answered 9 frequently asked questions about due diligence. Would you like to know more about this? And would you like to know how we conduct and oversee a due diligence investigation? Please feel free to contact us.