Following the preliminary negotiations and agreement in principle, due diligence is commenced. This second phase is critical to any business transaction and must be handled in an effective and productive manner, otherwise there can be significant negative consequences, including broken or delayed deals and the exposure of the buyer and seller to unexpected post closing liabilities. Most of these problems can be avoided if the due diligence is properly administered. Due diligence is understood by the legal, financial and business communities to mean the disclosure and assimilation of public and proprietary information related to the assets and liabilities of the business being purchased. This information includes financial, human resources, tax, environmental and legal matters.
Due diligence serves two roles.
For the buyer, it provides the opportunity to confirm the accuracy of the information disclosed by the seller. It also helps the buyer determine whether there are any potential business concerns, including, for example, the assumption of noncompete obligations, questionable receivables, liens on title to the assets, changes of control or assignment restrictions, government approvals or other issues that need to be addressed in the definitive agreement. It also helps the buyer evaluate and plan for the integration of the seller's business with its own. From a seller's standpoint, due diligence helps the seller ascertain rights that should be retained by the seller, determine any obstacles that could delay the closing and aid in the preparation of the seller's disclosure schedules for the definitive agreement. In order to attain each party's goals in the due diligence process.