Acquiring or investing in business usually requires a sizable amount of funds, be it from internal operations or external bank financing. Hence, for the price paid, buyers or investors are expecting to earn good returns and create valuable synergies to boost their existing business operations. It is important to ensure that the target business possesses the quality assets, sound structure and strong business drivers, rather than flawed systems, liabilities and a whole host of risks. The cost of an unsuccessful acquisition is high and deal failure can be prevented by proper due diligence processes.
Due diligence gives a realistic picture of how a business is performing now, as well as how it might perform in the future. It surfaces any deal-breakers, issues or problems that might need to be covered in the legal representations and warranties, and prepares the buyer for any post-acquisition integration challenges. Though an overwhelming and time-consuming exercise, it is not advisable to ignore a thorough evaluation of the target business. Where internal resources or expertise are lacking, business owners or private equity investors can engage professional advisers to conduct the due diligence exercise to examine different aspects of the target business and critical elements of the deal before rushing into a decision.
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