Due Diligence Explained

If you are ever involved in a business sale transaction, you will hear the term “Due Diligence” being used and talked about as a necessary component of the sale. For many buyers and sellers, it will be the first time that they are encountering this term and might not quite understand what it is. This article was written to provide a basic understanding regarding what due diligence is, and the role that it plays in a practice purchase/ sale transaction. 

What is “Due Diligence”?

Due diligence usually refers to the investigation process done by a buyer before a transaction becomes unconditional, to verify the facts and virtues of the business and to assess and uncover potential risks or liabilities.

Is a buyer’s due diligence on a business for sale just a financial investigation?

Due diligence in a vet practice transaction certainly has a focus on the financial aspects of the business. (for example, reviewing and assessing documents like Profit and Loss reports, vet software reports, tax returns)

However, due diligence on a business is not limited to financial due diligence alone. It will usually also include:

• Legal due diligence (for example, reviewing and checking the premises lease and zoning, radiation licenses, etc.)
• Operational due diligence (for example, reviewing open hours, roster, etc.)

When should due diligence in a business for sale be done?

Due diligence can be costly and time-consuming for a buyer and often involves a deeper level of exposure that the vendor would be comfortable giving to a lot of people.

For this reason, we usually see:

• A base level of due diligence done before an offer is made by multiple potential buyers. (for example: A review of the Profit and & Loss reports, vet software reports and premises lease)
• A more detailed due diligence to be completed by a single buyer once an offer of price and terms is accepted in principle (for example, checking tax returns, BAS and bank statements, radiation licenses)

If due diligence isn’t complete before contracts are signed, it is possible for them to be signed subject to a period of due diligence, BUT every effort should be made for due diligence to be completed before signing.

How long should due diligence take?

This depends upon:

• How detailed the due diligence requests are. Different buyers and larger-sized deals will necessitate more extensive investigation.
• How organised and responsive the vendor is to requests. 
• How readily available necessary documents for due diligence like premises leases, financials and supporting documents are.
• How clear the financials are when they are provided.

Can a seller do due diligence on a buyer?

Absolutely. We frequently help sellers with due diligence on buyers. For example:

 If the buyer is an individual, sometimes before we accept an offer, we will ask for authorization to speak to their source of finance to get comfort that they have access to the money offered.

If the buyer is a corporate, it is not uncommon to ask for references of practices that they have already bought. Questions that you might ask these corporates include:

- Was the transaction smooth or not?

- What are these corporates like to work with and for post-sale?

- How responsive are they when issues arise?