Due Diligence
The comprehensive investigation and analysis of a target business before completing an acquisition.
Full Definition
Due diligence is the process of investigating and verifying information about a target company before completing an acquisition. It helps buyers understand what they are buying and identify risks that may affect value or structure.
Types of due diligence: 1. Financial DD: Historical performance, quality of earnings, working capital 2. Legal DD: Contracts, litigation, corporate structure, compliance 3. Commercial DD: Market position, customers, competitors, growth prospects 4. Operational DD: Systems, processes, capacity, efficiency 5. Tax DD: Historical compliance, exposures, structuring opportunities 6. HR DD: Key employees, contracts, pensions, TUPE implications 7. IT DD: Systems, security, technical debt, IP 8. Environmental DD: Contamination, compliance, ESG matters
Due diligence process:
- Scoping: Determine areas of focus based on deal rationale
- Information gathering: Data room review, management presentations
- Analysis: Detailed review by specialist advisers
- Reporting: Issues identified with recommendations
- Price/structure implications: Adjustments based on findings
UK-specific considerations:
- Pension scheme liabilities (defined benefit schemes)
- TUPE implications for employees
- Stamp duty and tax structuring
- Regulatory approvals and licences
Thorough due diligence is essential to avoid costly surprises post-completion.
Related Terms
Data Room
A secure repository where confidential documents are stored and shared with potential buyers during due diligence.
Confidential Information Memorandum (CIM)
A detailed document providing comprehensive information about a business for sale to potential buyers.
Warranties
Contractual statements by the seller about the business, breach of which may entitle the buyer to damages.
Completion Accounts
Financial statements prepared at completion to calculate final adjustments to the purchase price.