Deals will fail before or after they’re signed unless comprehensive due diligence is applied.

When deals fail, it’s often during due diligence that an unforeseen problem occurs that had been overlooked during the initial negotiations. Indeed, a transaction can almost reach Heads of Agreement before the due diligence process throws up a clanger that can kill it all flat.

A recurring problem in smaller end deals is that due diligence is often more of an afterthought than an integral part of the initial deal stage. As transactions become more complex and legal issues take on a litigious turn for the worse, it’s essential that due diligence is built into the fabric of the deal.

Moreover, as buying and selling businesses becomes ever more complex, due diligence is becoming more sophisticated, and a good corporate finance adviser will makes sure vendors and acquirers are aware of the due diligence that can affect the outcome of their deal.

Legal due diligence
All legal checks are essential before you buy a business. At the very least, you’ll have to make sure the vendor owns the assets to the company. For this, you’ll have to hire a solicitor to inspect titles, deeds, patents and proofs of purchase. Your legal adviser will also need to look at any previous transactions that the vendor was involved in such as acquisitions or joint ventures. Past deals may carry liabilities that arise from representations and warranties that were agreed during the previous transactions.

Financial due diligence
Ranking alongside environmental and management checks, financial due diligence emerges as one of the most crucial investigations. You will only have yourself to blame if you’re lumbered with a second-rate firm after failing to scrutinise the target’s figures and books. To avoid this, you’ll need an accountant to provide an independent assessment that highlights commercial and financial risk areas. The report should include critical success criteria, key performance indicators, industry trends and taxation risks.

Commercial due diligence
You may be satisfied with the management or any environmental issues, but if the commercial side of the business has not been investigated then you could be squandering your money on a high-risk investment. To avoid this, you’ll have to review the vendor’s markets and projected profits.

Management due diligence
Probably the first step for anyone buying a company is to look closely at the existing management structure and the vendor’s management team will be the key to a successful sale. Interviews, psychometric tests and recommendations from advisers always provide greater assistance than an opinion based on gut feeling. The first priority is to interview each member of the management team to find out whether they have what it takes for the post-deal period. You also have to look at teamwork to see if the management team works well as a unit.

Property due diligence
Most property sales involve exchanging titles, but due diligence is needed to establish who owns the assets. Like environmental due diligence, property issues have to be looked into early on in the deal. Property liability has a tendency to suddenly appear and cause severe disruptions or even unravel the deal altogether (see environmental due diligence).

Insurance due diligence
This is needed to assess the vendor’s insurance cover and your lawyers will carry out a review to determine whether the vendor has sufficient insurance in place.
The review looks at any claims made to the vendor, the level of insurance in place and the competence of the insurers. The expert will also assess property insurance, employee compensation, liability insurance for management, and suggestions for changing insurance coverage.

Environmental due diligence
Often overlooked by many purchasers, the lack of environmental checks on a business has been an increasing deal breaker during the past few years. A raft of legislation has been introduced and you ignore it at your peril. Failure to comply could lead to heavy fines as regulators clamp down on companies that break the rules.