We are looking at the term DUE DILIGENCE. What is due diligence? As well as look at the meaning and definition of Due diligence the video will provide an example of due diligence in the acquisition of a business.
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Hi and welcome back to Speak Life Shaf. You know the deal, this is where I help you understand all that puzzling business jargon and along the way teach you a thing or two about becoming an entrepreneur. Today I’m going to talk to you about something really important, in business speak this is often abbreviated to DD we are of course talking about due diligence.
But first, I’m going to call on a friend of mine to help me explain to you what due diligence is. Here’s Rab The Rock Star. He lived in the Stone Age and was the world’s original entrepreneur. That’s right the very first entrepreneur .You see, he came up with a business idea to make and provide tools to hunters to help them catch their prey. His business soon took off and Rab did really well. He had employees and ended up having to move to bigger premises, a bigger cave, to accommodate his growing company. After many, many years, Rab was considering retiring and selling his business to a rival, Pete Pebble. Potential buyer Pete investigated Rab’s business. He looked at how it was run, found out how much Rab charged customers, what he reinvested his profits in. If Rab had kept written accounts instead of scrawls on the cave wall, Pete would have looked at those too! Essentially, Pete completed due diligence on Rab’s business before a deal was concluded. As an aside, Rab decided not to retire. He didn’t like the cut of Pete’s loincloth and refused to sell to him. In the end Rab’s daughter’s Boulder and Purity took over the business. So, our friend Rab can add successor planning to his list of entrepreneurial achievements,
In this day and age, due diligence is an investigation or exercise of care that a business or person is expected to take before entering into an agreement or contract with another party. Its aim is to identify any potential problems or unexpected liabilities. It’s used when entering into a partnership or a major contract.
A good example, similar to Pete Pebble, is when someone evaluates a business or company with a view to buying it. Due diligence means that any bid is informed, the risks, costs and benefits have all been looked at and considered and the price offered will reflect that. One thing that business people – and even more importantly, investors – don’t like is surprise and due diligence, in theory, lets them make informed decisions and avoid any nasty shocks at the end of the transaction. Buyers get exactly what they are paying for.
The trouble with this process is that it can take forever! Everyone wants a piece of the action. Brokers, lawyers, accountants can all get involved and you can bet your bottom dollar that they all want different pieces of information, which can sometimes prove tricky and time-consuming for the seller to source. As a general rule, buyers will want to look at records, accounts, assets, operations, competitors and market comparisons, and an analysis of intellectual property rights.
Due diligence is one of the most important things you can do before signing on the dotted line. We do it constantly, and even if we find something worrying, it doesn’t always mean the deal will be off. We simply consider changing the terms of the deal. Now that you know what it means, don’t forget to do it in your business life! Let me know what you think. Like, comment and remember to subscribe to my YouTube channel.
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