Due Diligence

What is due diligence?

If you’re unfamiliar with these words then they will be meaningless to you. They have to do with commercial transactions between buyers and sellers of real estate and other commodities and articles. It’s probably best condensed as “caveat emptor” which is Latin for “buyer beware”. For thousands of years at least, traders bargained with one another over price, terms of sale and engaged in tactics to get the better of one another usually on the question of money. Due diligence means doing your homework, being acquainted with all features of a transaction that you are about to enter in to, so that you have considered all possibilities and when you find things, they won’t surprise you.

Buying a house

You see a house advertised by an estate agent, you look at the pictures on the Internet and you meet the agent at their office and they tell you about the property and what a lovely home it will be for you. At first base, the agent is not your friend, they are a business acquaintance and they are the representative of the owner from whom they have been engaged to sell the property and if they do, then they are paid a commission as a percentage of the sale price. The agent will present as friendly, understanding and helpful and they will “suss you out” by asking harmless questions, all aimed at figuring out how much money you’ve got to spend and how much money you might be able to borrow. You will have an inspection of the house, most likely in the absence of the owners, and in the normal course of events the house will be neat and tidy and presented in its best light. You thank the agent and tell them you’ll be in touch (or rather, they’ll be in touch with you).

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If the property is appealing to you then this is the start of your due diligence, you need to investigate the house and as you may not have the requisite experience, you will engage a lawyer, a surveyor, a pest and building inspector and any other specialties that may be necessary for this particular property. You rely on these people to investigate the property to look after your interests and to give you the material to help you make an informed decision about whether to proceed (to buy) or not. It would be financially foolish not to do these searches and enquiries and obtain reports because you wouldn’t know what you are buying. The agent of course is not your agent and they owe you nothing.

Buying a business

Starting up a business might be a lifelong dream or buying a business to stop being an employee may appeal. The question is though, do you have the experience to jump into a business? You don’t have to look far, the Offices of Fair Trading have the statistics of the number of businesses that fail soon after takeoff, and there are a lot. Presumably you would have some liking for the particular line of business and have worked in it as an employee to get the “ins and outs” of the trade.

Again, like the real estate agent selling the house, the agent or broker selling the business can be expected to tell you how good the business is, that with some changes there is definitely scope for increased profitability and, while they don’t know for sure, it is possible that the owners might have been putting cash aside without paying tax on it. The brokers role then is to induce you to buy the business and this is where your due diligence starts. You’ll need a lawyer to look at the contract and an accountant to examine the books of account and you can assume that they will tell you that things look OK. Your personal involvement must be to keep the business premises under observation from across the street and keep tally of the number of people going in and coming out and what times metaphorically speaking. That gives you a basic grounding to know if the business is active or if the owner is propping it up until they find a buyer.

Due diligence isn’t hard, its self-preservation, it’s guarding your own pocket and making sure that you are confident that what you are about to do by committing is the right thing for you.

Don’t worry about suing advisers for negligence or not giving you proper advice, they have to fulfil the contract with you by not being negligent or careless and in the end, the decision rests with you. Besides, advisers and those writing reports and investigating for you usually will have you sign a contract of engagement which says that they will take all due care but are not responsible for anything. Their reports are useful as they might uncover things you never thought of.

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