Prior to buying a home or company the buyer will conduct due diligence. The process involves a exchange of documents, interviews surveys, site visits and interviews. It can be very time-consuming and requires a team of people who are proficient in a variety of business tasks. Organization and responsiveness on the part of the seller is key to expediting the process. The results can be used to help buyers determine the worth of the property and to identify potential liability issues.
A variety of financial items are examined in due diligence, including the company’s market capitalization, accounting practices, income. Assets, inventory management and LIFO costing procedures are all examined during due diligence. It is essential to look over the background of a company, including any lawsuits or regulatory actions.
Due diligence could also be focused on management structure and ownership of the company. A buyer might want to know, for instance whether the founders of the company and executives own a large number of shares and how often they sell shares. The fact that they have a stake in the company’s performance is positive, and a company’s owners should be part of the future of the company.
Due diligence should result in a clear understanding about the overall financial health of the company and whether the model is suitable for a buyer. This is a crucial step in determining the value of a company and could make or break the deal. Unless the information is in dispute, a buyer can back out of the purchase without penalty if the information uncovered during due diligence is incorrect or otherwise unfavorable.