Knowledge base item

What happens during an audit?

Investigating potential risks

The due diligence, also known as due diligence or abbreviated DD. The due diligence is an important step in the acquisition process. This step takes place after a letter of intent has been signed between a potential buyer and seller. The due diligence has two purposes:

Prior to the audit

Before signing the letter of intent, the selling party has provided information to potential buyers in the form of anInformation Memorandum (IM). Based on the IM and management interviews, potential buyers take the decision whether or not to proceed with the acquisition process. The IM highlights issues such as the product portfolio, a competitor analysis and the financial figures of the company. During an audit the potential buyer is given access to the documents on which the IM is based, so that he can confirm that everything is correct, complete and reliable.

In the preparation for the audit, various matters are coordinated. Aletter of intent (LOI) is drawn up. In this LOI it is determined in which way the results of the due diligence have an impact on the follow-up. Furthermore is discussed in which way the audit will take place, for example by means of avirtual data room, and how follow-up questions will be answered (in a document or at a planned moment).

The research areas within the book investigation always contain a financial, legal and tax component. In recent years the ICT component has also become prominent. For ICT companies this goes without saying, but also for non-ICT companies the ICT management and architecture (privacy/security) has become enormously important. Other research areas that regularly recur are the commercial DD (sales strategy, references, customer loyalty) and research of specific patents and/or IP of the company.

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During the audit

During the buyer's due diligence the buyer is also given the opportunity to examine company-specific risks. Think of issues such as contracts, both with employees, customers and suppliers, but also current or expected litigation against the company.

An acquisition advisor supports the book research by mapping out in advance which areas will be investigated and which documentation needs to be collected for this purpose. The acquisition consultant will ensure that the investigation is and remains clearly defined. He does this by defining the investigation areas and the corresponding questionnaire, but also by defining the lead time of the due diligence. The average duration of a DD is about 2-6 weeks.

After the audit

The result of the audit is added to the sales agreement. This is usually done in the form of a secured USB or hard disk. If after completing the transaction there is still something wrong, this can always be referred back to. In some transactions the seller is asked to stand surety for certain things that stand out during the book investigation and/or until the moment of legal transfer. By a well executed due diligence the seller is protected for possible claims afterwards.

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Stef Kolen
Stef KolenCorporate Finance Advisor

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