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The Importance of Due Diligence

By Claire Barron - 15 Mar 2013

When buying a business or shares in a company due diligence is essential. Most people wouldn't buy a house without getting a LIM report, doing a title search, checking building consents and possibly obtaining a building report. Buying a business or shares is no different. It is essential that you know what you are buying. It is far more cost effective to carry out due diligence than deal with a bad acquisition.

Thoroughly investigating all aspects of the business that are material to a purchase allows you to assess the risks and opportunities of a potential transaction prior to committing to the purchase. This involves not only checking financial accounts, but also ensuring there are no pending legal or employment issues, ensuring there are no problems with major customers or suppliers, and checking that any representations made by the vendor are correct. If risks or liabilities are identified during the due diligence process, you may be able to renegotiate the purchase price or insert additional requirements into the sale and purchase agreement.

There is a school of thought that rather than do due diligence, you can rely on the warranties in the sale and purchase agreement. This is, however, the ambulance at the bottom of the cliff. Enforcing vendor warranties takes time and money and at the end of the day, a warranty is only as good as its giver, who may have vanished or who may not have enough money to pay up. It is preferable to avoid the risk in the first place by identifying it during due diligence.

Due diligence is simply a matter of good business practice. If you are considering purchasing a business, give us a call to discuss.

Contacts

Claire Barron

Melissa Higham

 

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