An investigative due diligence is usually undertaken by a third party on behalf of a potential buyer of a business or asset. The purpose of the investigation is to ascertain all the material facts and issues relating to the planned transaction, in order that the buyer is able to make an informed decision.
An excellent definition of investigative due diligence work is also offered by Kroll.
Investigative due diligence work
The size and financial value of the potential transaction will largely determine the extent and cost the potential buyer is prepared to expend on the investigative due diligence. Regrettably, the amount of work required to undertake a thorough and reliable investigation cannot be cut to meet the size of the financial cloth.
This is a serious problem, particularly if the potential transaction is about a smallish business.
The potential transaction involving a small business often actually require more investigative work than the acquisition of a well-established medium-sized or large enterprise.
The reasons for this are fairly obvious, being
- a greater lack of proper record-keeping,
- fewer internal controls,
- little if any governance processes in place,
- extensive non-compliance with laws and regulations because of insufficient funds or time of personnel to do it, etc.
Much of the information gathered during the investigation of a small business will probably be on the basis of the potential seller’s explanations, with little if any documentary proof usually being available. This significantly weakens the benefit and value of the investigation, as the information could be wrong, even deliberately misleading.
Notwithstanding this, any potential buyer would be foolish not to undertake, or have a third party like ourselves undertake an investigative due diligence on its behalf. The saying of “spend your money quickly, repent at leisure” certainly applies when considering the purchase of a business.
A critical factor is the time and expenditure the potential buyer is prepared to allocate to such an investigation. We would normally approach such an assignment by assessing a series of key factors, in sequence, until the funds run out.
The lower the amount of funds allocated to the investigation, the fewer of these aspects would we be able to assess, generally speaking:
- Contractual covering terms and conditions, payment terms, guarantees, VAT implications, training, hand-over arrangements
- Finance, budgets, management accounts, annual financial statements, solvency, auditors’ reports
- Funding including cashflows, banking, overdrafts, term finance, leases
- Trading operations including sales trends, records, filing, suppliers, clients,
- Administration covering processes and procedures, documentation, filing, accounts receivable, accounts payable
- Legal and contractual matters covering such matters as premises lease, asset leases, regulatory requirements,
- CIPC, compliance with Companies Act, minute books
- SARS covering returns to SARS for PAYE, VAT and income tax, payment of amounts due
- Personnel covering all aspects of record keeping, regulatory compliance, financial and other benefits, restraints of trade, retirement benefits, PAYE
- Fixed Assets covering what is included in the proposed transaction, ownership, condition thereof and reasonable value
- Stock covering what is included, ownership, condition, reasonable value
- Industry, local markets and economic conditions including market segmentation, market trends, competition, strength of business’s brand in the market
Please call us for a discussion. We know what must be done.
