Secondly, sufficient time should be allowed 

for the process to be done properly. Vendors 

typically lobby for the shortest Due Diligence 

period possible to minimise the risk of 

detection of undesirable issues and also to 

limit costs. However, if a purchaser is not 

afforded sufficient time to learn almost all 

there is to know about the business, it is 

unrealistic to expect them to acquire it. The 

message is that purchasers should devote 

ample time to the process and vendors 

should be understanding of that allowance. 

Vendors will enhance their perception in the 

eyes of the purchaser if they are seen to be 

supporting, rather than rushing, the process.
Thirdly, there is a lot more to a business than 

the contents of the financial statements and 

tax returns. Although the financial history 

of a company is extremely relevant, most 

Due Diligence processes will go far beyond 

financial analysis. The financial health and 

prospects of the business should be viewed 

as a necessary, but not the only, condition for 

purchase.

CULTURAL ISSUES

The vendor must also manage certain cultural 

issues surrounding the process, not least of 

which is the decision as to who inside the 

organisation is to be made privy to what is 

going on. It will be impractical to keep Due 

Diligence a total secret as the purchaser, 

understandably, will want to meet and 

make enquiries of a raft of key personnel 

throughout the organisation.

By the same token, vendors are 

understandably reticent to tell more people 

than what is necessary, as the mere fact 

that owners are looking at selling can be a 

disruptive and morale-destroying factor. In 

essence, a balance needs to be struck between 

those who reasonably need to be made aware 

and those who don’t. Importantly, the issue of 

who is in the know and who is not needs to be 

clearly communicated (preferably in writing) 

to the purchaser so that they do not err by 

leaking the news to the wrong person. What a 

vendor does not want to see happen is a staff 

member, particularly a senior one, finding out 

second hand of a proposed transaction.
A further cultural issue surrounds the 

inevitable uncertainties that staff members 

will have about their own tenure once they 

discover a change of ownership is in the 

wings. In some cases the purchaser will take 

over the existing staff list, assuming leave 

liabilities in the process. In other cases, 

they will not. If it has been made clear by 

the purchaser that they will not be wielding 

the axe, then the vendor should take every 

possible step to allay the fears of staff. The 

better the frame of mind which staff members 

are in, the more likely they are to provide 

truthful and enthusiastic information to 

the purchaser making enquiries of them. A 

cynical staff member who is resentful of a 

change of hands and fears for their future, 

could be damaging to the process and, in 

some cases, fatal to the cause.

ITEMS TYPICALLY SOUGHT 

An important thing to understand about Due 

Diligence is that every process is different. 

The size of the transaction, the nature of what 

is being purchased (e.g. an asset, a business, 

a company, a group of companies), the size of 

the purchaser and vendor, the history between 

the purchaser and vendor and the degree 

of government regulation surrounding the 

transaction all play a role in determining the 

scale, scope and duration of the Due Diligence 

process. Despite Due Diligence being a varied 

process, the following sample Due Diligence 

checklist for the acquisition of a business will 

provide a useful insight into the extent of a 

purchaser’s requirements.

✔

FINANCIAL RECORDS

•  Copies of financial statements for the past 

three financial years

•  Copies of income tax returns for the past 

three financial years Reconciliations to 

show how source accounting data from 

the vendor’s system was evolved into the 

financial statements

•  Reconciliations to show how the profit 

or loss in the financial statements was 

evolved into the taxable income per the 

income tax return

•  Copies of Business Activity Statements 

for the past three financial years

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