When you are involved in a deal, whether it is a large strategic transaction, or a possible merger, acquisition, stock sale, or going public, you will start hearing the words “due diligence” thrown around. A lay person may not be familiar with this term, and it may not make sense. If you are like most business owners, you don’t play in the merger and acquisitions space, and you don’t read legal periodicals. You probably do not talk to lawyers every day.
Let’s break down what the term means. Due diligence is a fact-finding expedition, usually directed by the person who is making the purchase of a company or stock. Or, it might be the person doing a strategic transaction with another party to cover risks.
Due diligence is a financial, legal, and operational audit. The person considering the transaction is conducting due diligence to find potential problems. They want to know what to watch for, where to direct their attention. They will ask for a lot of documents and materials, so as to get a better understanding of your company. If you are in a merger context, the due diligence exercise is often an excuse for the buyer to lower the price.
You wanted to complete a transaction, but now suddenly you are going to have an examination. What do you do about this? The best thing you can do about the possibility of due diligence is to prepare yourself by planning ahead. These things are routine to a lawyer or a consultant. They will know what to expect. Due diligence lists are extensive, but they are fairly protectable. You can prepare in advance, with a lawyer’s help, if you know you have a transaction coming up and start getting your books and records in order.
The best time to fix problems is before you are in the middle of a transaction. You will have more time to fix problems and maybe even save money. And, you are going to make the transaction go more smoothly. Having your due diligence materials put together well may even impress and give confidence to the other party.
Due diligence may be an unfamiliar term, but it simply means research. People sometimes throw it around too easily, but it is nothing to be scared of. With the right help, it is something that you can work through.
Have you heard the word due diligence before? What has been your experience with it? Has it concerned you? Join us in the comments below.
This posting is intended to be a tool to familiarize readers with some of the issues discussed herein. This is not meant to be a comprehensive discussion and additional details should be discussed with your attorneys, accountants, consultants, bankers and other business planners who can provide advice for your circumstances. This article should not be treated as legal advice to any person or entity. Freeimages.com/Photographer Imre Vegvari.
About the Author
Shawn McBride — R. Shawn McBride is the Managing Member of The R. Shawn McBride Law Firm, PLLC. Shawn works successful, private business owners in their growth and missions to make a company that stands the test of time. You can email R. Shawn McBride or call (214) 418-0258.
Check us out on the web.
Add us on Twitter: @rsmlawpllc
Like us on Facebook.
Make sure you download our free reports on how to build your company the right way.