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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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