Due Diligence is the means by which a person or organisation investigates the affairs of an organisation, market or individual with a view to establishing whether they wish to become involved with them in a formal capacity such as by providing funding, making a purchase or merger offer or entering a particular demographic market with their product or service.
The Due Diligence can take many forms.
It can involve physical visits to and inspections into the affairs of the organisation or individual, searches of public records, the submission of written requests for specific information, or a combination of all of these.
Due Diligence can typically last a period of weeks or, in more complex cases, months.
Adverse Due Diligence findings can result in a funder or buyer at worst withdrawing from negotiations and at best seeking to apply a lower valuation to the organisational or individual target.
Thus some proactive organisations or sole traders which are planning to enter, for example, a fund or sale process, take the StressBusting™ initiative in preparing their own written Due Diligence pack for use when the time comes.
This is known as "Advance Due Diligence" and enables any issues to be identified to be rectified or addressed before a negotiation process commences.
This is a valuable corporate exercise that we think ought to be performed in its own right periodically irrespective of imminent fund or sale prospects.
It is important that responses to Due Diligence questions and queries be honest and accurate, as claims could result otherwise, and the risks of litigation are well flagged in our post entitled "The Dangers of Litigation to Corporate StressBusting™".
Due Diligence questionnaires are typically divided into a number of sections and we provide a sample of our favoured format below.
If you can relate to the contents of this post and would like the further value of our extensive expertise in this area, please reach out to us in confidence via our "Contact" page.
For further information in this regard, please consult our "Legal Notices" page.
Sample Due Diligence Questionnaire
Ownership Structure & People Strategy
1. How involved are the majority shareholders in the day to day running of the business?
2. Do the shareholders know what the business is worth?
3. Would the shareholders benefit from Entrepreneurs Relief if the business were sold in short order?
4. If the owner were not involved in the business for a prolonged period, could the employed management team continue to operate the business?
5. Do the employed management team have EMI Share Options or minority shareholdings? If not, how are they tied into the business?
6. If applicable, how involved are any minority shareholders in the running of the business?
7. Are there currently, or have there been, over the last 3 years, any shareholder disputes and, if so, how were these resolved?
8. Are there any trust arrangements attaching to any of the shares in the organisation, to the directors and shareholders’ knowledge?
9. Do the shareholders and main directors have Key Person insurance/critical illness cover in place? And what other business insurances are in place?
Financial Analysis
1. How has the turnover generated by the business changed in the last few years?
2. How have profit margins fluctuated over the last 5 years?
3. Does the business prepare monthly management accounts?
4. Does the business prepare full forecasts, including P&L, Balance sheet and Cash flow?
5. Does the business prepare divisional P&L accounts for the different products and services offered, as well as different offices/departments/geographical regions?
6. What are the debtor and creditor days? How have these changed in recent years?
7. What level of dividends do the shareholders take on an annual basis?
8. Have the shareholders thought about the long-term benefits of leaving cash in the business?
9. When is the last time the organisation had a HMRC CT/VAT/PAYE investigation? What was the outcome of this?
10. Is the business of the organisation "seasonal" and if so, in what way, and how does that affect the financial performance during quiet periods?
11. To the extent that the business owns, uses or has developed Intellectual Property, how is it effectively using this to secure effective onward tax planning through, for example, the R&D Regime and Patent Box?
12. What internal approval processes does the Organisation have in respect to spend and what other delegated authority policies are in place?
13. What is the biggest financial risk to the future success of the Organisation?
Customer & Supplier Analysis
1. What is the split of total turnover/gross profit split by the Organisation’s top 10 customers? Is there undue reliance on any one customer or supplier?
2. Does the business have contractual agreements in place with customers, suppliers & key strategic partners?
3. Might there be any change of ownership provisions in any customer & major supplier contracts?
4. Does the business have multiple relationships with different individuals at each of its larger, more important customers and suppliers?
5. How does the organisation target and approach new customers/prospects?
6. What customer complaint/dispute resolution procedures does the organisation have in place?
7. How often are alternative to any material suppliers considered/market reviewed?
8. Does the business have standard terms and conditions of supply and, if so, what do these contain and when were they last updated?
9. Would the organisation require the consent of any supplier or customer were its shares or business to be transferred to a third party?
Competitor Analysis
1. How often does the organisation “map” the market in which it operates?
2. Are the shareholders aware of what new developments/initiatives its competitors are working on?
3. Who are the organisation’s key competitors?
4. Of its key competitors, who are their key customers and staff?
5. What is the organisation’s main 3 advantages over its competition?
6. Is the competitive market in which the organisation operate overly fragmented or likely to consolidate?
7. Has the organisation, at any time over the last 3 years, approached, or been approached by, a competitor, with a view to acquisition or merger and, if so, what was the result of such approach?
Legal Issues
1. Are there a shareholders’ agreement and up to date, fit for purpose Articles of Association in place?
2. Do all shareholders have any / up to date Wills or Lasting Powers of Attorney in place?
3. Are there up to date employment contracts in place for all staff?
4. Are there any on-going legal disputes/contingent liabilities? What has been done to mitigate the risk of these being realised?
5. If applicable, when is the last time the organisation reviewed its property lease and fund agreements?
6. How does the organisation keep up to date with all necessary regulatory requirements? How does the organisation manage its intellectual property rights?
7. Is the business registered with the Office of the Information Commissioner?
8. Has the organisation ever engaged in any tax mitigation /reduction strategies?
9. What internal policies does the business have in place and how does the business ensure that all relevant staff are aware and updated as to key changes in the Law?
10. Who holds the organisation's Statutory Books and are they up to date?
11. Does the organisation hold an internal PSC Register and are relevant individuals registered centrally?
12. Are the Organisation Employee Handbook and Health & Safety Policy up to date, and when was the last time they were reviewed?
13. What insurances does the organisation have in place to protect the interest of itself and its officers?
14. Does the organisation have any share option or analogous bonus schemes in place for its key officers and staff?
15. Are sales and supply terms and conditions up to date with legal changes? Do they adequately protect the organisation's interests?
Funding Structure
1. When is the last time the organisation reviewed its current funding requirements?
2. Does management have clear visibility of its projected cash flow cycle/pinch points, and the impact on this of taking on major new orders?
3. How much does the organisation pay in interest/finance costs per annum? Has the organisation stress tested the impact of a further increase in interest rates?
4. Do the organisation’s current funding facilities give the flexibility to develop new initiatives/projects?
5. Do the shareholders provide personal guarantees to its existing funders or partners?
6. What level of additional funding could the business gain access to, if it was required?
7. Are there any directors’ loans in existence and what are repayment terms?
8. Is the organisation tied in to any fund arrangement for a specific period and, if so, how long?
9. Does the organisation use invoice financing and, if so, who with and on what terms?
10. Has the organisation breached any funding covenants in the last 3 years and, if so, why and how was this resolved?
Future Growth Strategy
1. Does a formal business plan documenting the future growth strategy of the organisation exist?
2. What obstacles have been identified as a potential bar to growth moving forward?
3. To what extent, and why, is any growth strategy identified by the Organisation "SMART" - Studied, Measurable, Achievable, Realistic and Timed?