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Due diligence when buying a business

business advice women interview notes

If you're considering buying a South African business, then it's absolutely critical that you should understand exactly what it is that you are purchasing.

In particular, it's vital that you should understand whether you are paying a fair price.

The process of due diligence is a formal approach that can allow you to gain a greater understanding of how an existing business is really performing. It involves carrying out a full investigation into the finances of an enterprise and the commercial activities of that business.

Analysis

As part of the process, a comprehensive analysis is carried out of all elements of the business, from marketing to legal requirements. As might be expected, the due diligence will often involve a substantial team of individuals, since it's unlikely that a single professional would have the requisite knowledge to handle the whole process.

Under normal circumstances, therefore, the due diligence process would be expected to involve a number of professional experts. Most due diligence operations in South Africa tend to make use of accountants and solicitors, in order to check the financial and legal aspects of any deal.

As an initial part of the process, the offer price is usually considered. Indeed, much of the analysis is likely to focus on whether a variety of key indicators point to the price as being fair.

It will often be the case that the process will reveal certain anomalies or issues. This will usually open the way for negotiations to be carried out, which may result in the sale price being re-negotiated too. Under some circumstances, alternative solutions may be identified, as a result of problems outlined.

Buyer's responsibility

The prospective buyer will usually drive the due diligence strategy and it would be expected that the process would cover many areas. It is often relevant, for example, to give consideration to employee contracts, IT systems, pension arrangements and contracts that are in place with both customers and suppliers. The vendor is expected to make such information available and the professionals involved are required to treat business information of this nature as being confidential.

If you're looking to appoint professionals to carry out the work that is involved, then it's critical that you should look to hire specialists.

If you're looking to appoint professionals to carry out the work that is involved, then it's critical that you should look to hire specialists. In particular, there is a need to confirm that accountants and solicitors have expertise in the area of business acquisitions. It's reasonable to expect that they should have a solid understanding of the South African market. Ideally, they will also have strong knowledge of the business sector concerned.

Questions

If you have specific queries, then it makes sense to raise these at an early stage. It should also be noted that unique, specialist knowledge is required when dealing with some sectors. This is particularly important when dealing with highly regulated sectors, as is the case with banks, insurance companies and many financial institutions.

It is not enough to hire professionals with broad levels of experience. Instead, it's critical that those with detailed knowledge of individual sectors should be consulted.

There is a danger that licenses could even be revoked by the authorities, if it's deemed that a buyer of a finance company is not suitable to be the owner. As can be seen, this makes it vital that due diligence should be carried out by experts with appropriate levels of knowledge.


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