Due Diligence can be defined as the "in-depth examination" of a business by an objective party - a fact-finding process focusing on the authentication of profits and representations made about the business by the seller or broker and also focusing on key issues which may not have been disclosed to you, or matters which could have a significant impact on the future viability of the business. The findings revealed by a comprehensive Due Diligence will assist you to appraise the business properly, to identify the risks of the business and it will help you to make an informed decision whether to buy or not and how much to pay for the business. The Due Diligence is the final stage in the buying process before you close the deal and this is the time when you will have complete access to all of the business's books, records, files and information. You should use this opportunity to conduct such an exhaustive investigation into the affairs of the business that by the time you're done you'll know more about the business than the current owner does. Every business has secrets and every seller knows certain things that they don't want you to discover. The question is: Are you going to learn what they are before or after you buy? Once you close the deal it's too late! The consequences can be enormous. Your investigation must be focused and intense. 1. Preparation In order to conduct a thorough Due Diligence you must arm yourself with: a.   a detailed plan listing the exact steps and processes to follow b.   a checklist of everything to complete in each category c.   specific tasks that need to be completed by specific people (Accountant, Lawyer       etc) d.   all of the records and information required from the seller before you start 2. Time Restrictions Allow yourself sufficient time to conduct a proper Due Diligence - do not settle for 10 days when you actually need a calendar month! Remember that there are many key areas to investigate in a small business, each with equal importance. 3. More Than Just Financials A proper Due Diligence goes far beyond the financial statements of the business. Most people completely ignore the other key areas to be reviewed. It's a recipe for disaster! 4. Only Pay for Profit Don't fall into the trap of getting emotional about the business before you buy it - authenticate the profit first! SOME KEY FIELDS TO BE COVERED IN A DUE DILIGENCE 1.    Stated profits and representations made about the business by the Seller or        Broker 2.    Future viability of business and demand for products / services 3.    Fair valuation of business assets & liabilities and authentication of ownership 4.    Inventory & Work-In-Progress, obsolete, damaged, slow-moving goods 5.    Sales - history, trends, seasonality, margins etc 6.    Customers and special terms and conditions of sale 7.    Marketing & promotions 8.    Premises, Lease Agreement, claw-back clauses, escalations, legal use of        premises 9.    Employees & Payroll 10.  Suppliers and special terms & conditions of purchase 11.  Administration, Systems & Procedures 12.  Contracts and Legal Matters 13.  Royalties & Franchise Agreement. Franchise entry fee. Training 14.  Competition in the market / area 15.  Financial Statements and fair presentation of financial position of business 16.  Credit Record & Litigation 17.  Statutory Taxes (VAT, CGT, PAYE, STC, etc) & Levies 18.  Short-term Insurance cover and claims history 19.  Contingent liabilities - "Yellow pages", Staff Retrenchments, Guarantees etc 20.  Snag-list and "soft" upgrades 21.  Advertising sale of the business in terms of Section 34 of the Insolvency Act 22.  Restraint of trade agreement The above list is not exhaustive and merely serves as a guideline. FREQUENTLY ASKED QUESTIONS 1. Q. How much does a Due Diligence Investigation cost?       A. We charge strictly for our time spent at a rate of R700 per hour, inclusive of VAT.          Ideally the Purchaser should budget for at least twelve to fifteen hours of our time on         a small business.   2. Q. How long will it take?       A. Our time spent on the Due Diligence will be determined by the scope of the Due         Diligence and specific areas to be covered and authenticated, also by the accuracy         and availability of financial records and supporting documents maintained by the         Seller.        3. Q. Where do you perform the Due Diligence?        A. We make arrangements to meet the Seller on-site where we conduct our          investigation. Normally all books and records are kept on-site.          4. Q. What if you find discrepancies in the Seller's books?        A. We immediately stop the investigation and take further instructions from the          Purchaser.       5. Q. Can you recommend a cheaper option than engaging your services?       A. Not really, however, we have had a case where the Purchaser had a strong         accounting background, performed the Due Diligence Investigation himself, and then         only paid for our time to evaluate and report on his findings. For more information please contact Richard Ferguson on +27 31 566 6640 or email us by clicking here.
Due Diligence 
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