(due diligence – 5 minute read)
Hi there accounting fans!
Let’s talk about due diligence. If you’re into business or looking to buy/sell a business, I’m sure you’ve come across this term of due diligence. Due diligence is an important step before making any big investment.
What is due diligence?
Business due diligence is the process of thoroughly examining a company’s financial and operational information before making a business decision, such as investing in the company or entering into a partnership. It helps ensure that you have a clear understanding of the company’s strengths, weaknesses, opportunities, and risks.
Conducting business due diligence is important because it helps protect your financial interests and minimizes the risk of making a bad business decision. It allows you to uncover any potential red flags or issues that could impact the company’s future performance.
What issues can it uncover?
If you’re considering investing in a company, conducting business due diligence can help you identify any financial mismanagement, legal issues, or other problems that could affect the company’s value. It can also help you determine the company’s potential for growth and profitability.
Due diligence also helps you determine if the asking price for the business is worth it. It also gives you evidence to back up your claims should you want to negotiate a lower purchasing price. Most importantly, due diligence gives you an idea if you should buy the business or walk away from it.
What is covered in due diligence?
At our accounting firm, SH Advisory we focus on financial due diligence. We make sure that the price that you are paying for the business is the right price. Due diligence consists of:
- A financial due diligence report – analysing the profitability and growth potential of the business over the past few years
- A forecast for future financial performance – forecasting the growth of the business (useful if you are looking at getting a bank loan to fund the purchase)
- An opinion of whether we think the business is a good buy and some suggestions on how to make it more profitable
Due diligence can represent a reasonably big cost, but it is still less costly than making a bad business purchase.
So, there you have it – the importance of business due diligence in a nutshell! Remember, thorough research and analysis can help you make smart business decisions and protect your financial interests.
Stay positive!