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What is due diligence and why should I do it?

By Beatrice Thomas

You wouldn’t buy a car without looking under the bonnet first and checking the running order of business before making an offer is no different.   

Due diligence is the engine check of a business. It is a detailed investigation completed by a business or person before signing a contract or starting an ongoing business or employment relationship.  

John Travers, managing director of fruit and vegetable producer Odeum Farms, has had plenty of experience seeking to acquire like businesses and to partner in farm joint ventures.  

He says Odeum has developed a comprehensive approach to due diligence that ensures potential problems or unexpected liabilities are known well in advance of making an offer. 

“When a vendor puts their business to market or an equity event, we form the due diligence arrangement which includes a confidentiality agreement,” Travers explains. 

“The arrangement should include a plan set up by the purchaser to go through various steps to pop out information at the other end that will allow them to decide either way as to whether the purchase transaction will go ahead.” 

Travers says its an essential process and without it you are going into a business without thoroughly checking every aspect of its operations carefully. 

“You’re believing what the vendor has told you – and they are always going paint a rosy picture – and, indeed, at times, they might not know the position of their business because their management, administration or accounting team does not provide correct information for them,” he says. 

“That is generally the case when the business is in trouble and requiring a rescue from a white knight.” 

Travers says a business should spend a lot of time completing a thorough due diligence process. He says Odeum will usually spend about two to three months on the site of a target business going through this multi-step plan:  

  • Meet with the vendor to introduce the due diligence team and tell everyone honestly and openly about the process that is underway. It is vital that the target business is supportive and unfettered access is provided to all aspects of the business. 
  • Analyse the organisational structure to get the “lay of the land” within the organisation. This will provide information about the people and their roles. It is also common to find a structure is out-of-date or doesn’t exist. 
  • Interview everyone with a set template of questions. From that, you can find out the strengths and weaknesses of the employees. It can also reveal nepotism in the business. 
  • Culture map the various sections of the company using feedback from the interviews. This will provide an understanding of the operations, research and development, quality assurance processes. 
  • Assess customer contractual arrangements regarding product pricing, sale pricing, unique selling proposition. 
  • Assess the human resources recruitment process including induction procedures, training. 
  • Make a financial evaluation by inspecting three years of accounting, tax returns, budgeting, cash flows, stocktake procedures, proper inwards procedures and data input procedures 
  • Assess operational efficiency, for instance, is the businesses warehouse efficient or are there areas that could be opened-up or removed. 
  • Commission an independent report on capital infrastructure including trucks, forklifts, processing plant and other machinery. 

Travers says Odeum has always got the best results from completing due diligence themselves but advises a business should seek advice from variety of recommended and independent resources if they plan to outsource the work. 

You wouldn’t buy a car without looking under the bonnet first and checking the running order of business before making an offer is no different.   

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