Due Diligence is the systematic examination of a company before the purchase. Before you commit for good, you build an accurate picture of the economic, legal and tax situation.
Several areas are usually kept apart: Financial Due Diligence for figures and finances, Legal Due Diligence for contracts and law, Tax Due Diligence for taxes on a business sale, and often a Commercial Due Diligence for the market and customers.
The basis is a data room, where the seller provides the necessary documents in a structured way. Annual financial statements, contracts, personnel records, open legal cases: everything sits ready, and the buyer and advisors work through it point by point.
The examination usually takes place after the letter of intent and before the purchase agreement. Its findings feed straight into the negotiation. If risks turn up, the price often drops, or warranties are agreed.
How deep the examination goes depends on the size and complexity of the business. For a small bakery or bicycle workshop it is done in a few days. For more complex firms it runs for weeks and pulls in several specialists.
For business sellers
For you as the seller, Due Diligence means one thing: you open up your documents. The better prepared and tidier your figures and contracts are, the more smoothly the examination runs and the more trust is built.
You only release sensitive data once there is serious interest and a confidentiality agreement has been signed. Surprises that only surface during the examination often cost you both price and trust in the end.
For corporate buyers
For you as the buyer, Due Diligence is the most critical phase. This is where it is decided whether the company delivers what the information memorandum promises, and whether the price is justified.
Get support, especially with figures, contracts and taxes. An overlooked risk can become expensive: an outstanding back payment, a cancellable major order, or a heavy dependence on the owner that weakens the business after the handover.
Example
A small software provider is to be sold for 620,000 euros. During the Due Diligence, it emerges that an important customer contract can be cancelled at short notice. The buyer and seller then agree on a reduced price of 540,000 euros.
FAQ
When does Due Diligence take place?
As a rule, after the letter of intent and before the signing of the purchase agreement. It is the step in which the buyer examines the company in detail.
Who pays for the Due Diligence?
The buyer usually bears the cost, as the examination is in their interest. For small businesses it is often leaner than for large transactions.
Do I need an examination when buying that I wouldn't need when founding a company?
Yes. When buying, you take over an existing company with a history, contracts and possible legacy issues that you should examine. In return, you don't start at zero: you take on something alive, with a customer base, a running business and settled processes. Founding a company spares you these risks, but leaves you without that business.
What happens if the Due Diligence uncovers problems?
Then there is renegotiation. Often the price drops, warranties are agreed or part of the purchase price is retained. In extreme cases, the deal falls through.
How long does a Due Diligence take?
That depends on size and complexity. For small businesses often just a few days to weeks, for more complex companies correspondingly longer. Good preparation by the seller noticeably shortens the duration.
What is a data room?
A protected area in which the seller provides all relevant documents in a structured way: figures, contracts, personnel and legal documents. Today this is usually a digital, access-restricted folder. See data room for more.
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