The buzzword here is caution. Information about companies isn’t as freely available, thus more risk is perceived, making buyers more cautious about undertaking transaction. Clients will be insisting for greater details due to heightened caution, making information–gathering processes longer.
Company’s value can be difficult to be established fairly and accurately because of market volatility. The gap between a buyer’s off and a seller’s price widened.
Due diligence exercises have become more detailed. Greater caution is being seen vis-à-vis projection where even minor aspects are under the microscope. Strategies are definitely shifting. The demand for more detailed information that could even extend to individual personal histories and tax profiles.
Before the global financial crisis, due diligence took less time. Company’s general financial matters come under intense scrutiny. There are at least 10 other areas being examined in more detail:
3) Company synergies
5) Credit Records
7) Deal Economics
8) Post-deal risk mitigation
9) Policies & Procedures
Due diligence is carried out by many parties. Carrying out due diligence helps identify problems or shortfalls that can be effectively addressed by the seller. Advantages when due diligence is carried out by those who want to sell their business:
· Identified possible problem areas can be ratified.
· Potential buyer is less, likely to have to deal with “surprise” during sales process
· Can substantially reduce the time taken to complete the deal
· Seen as an attempt at better transparency and more serious about the deal.
Different buyers look for different things. Due diligence basically gives an assessment of the health of an asset from various standpoints:
The role of due diligence advisor help provide additional, unexpected perspective of risk. Sometimes, in dealing with details, the big picture slips under the radar. Good advisor can contextualise the information in relation to current market events and industry performance highlighting serious implications or adverse impacts.
People are taking more time and become more discerning about the kind of due diligence that is being conducted. They are looking for more details and applying deeper analysis before making any commitments. Companies have adopted a wait and see approach, with caution the overriding factor in all transactions.
Focus will still be on cash flows and working capital. Even so, a certain amount of anticipation need to be applied so that future hot spots can be identified and rectified. Due diligence should also ideally lead to better understanding of the business and assessment of its long-term potential
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The importance of Being Diligent