Due Diligence refers to the process under which a potential buyer and its advisors carry out in-depth investigations into many aspects of a proposed target company, in order to gain a solid understanding of that company’s business and/or market. Due diligence can help a potential buyer to decide whether to go ahead with the purchase and if so, at what price and on which terms.
When conducting due diligence, companies (or their lawyers) will usually be afforded access to a ‘data room’ (nowadays this is typically an online database) containing comprehensive information relevant to the transaction including: commercial contracts, financial records and information on existing assets and liabilities. This helps bidders to understand in greater detail that which they are considering purchasing and provides advisers with an opportunity to discover (and subsequently mitigate) any potential issues.
Sellers may put restrictions in place to prevent potential buyers (which may well also be existing competitors) from discovering too much about the company, thus reducing the ability of potential buyers to use such information to their own advantage if the deal falls through at a later stage. A confidentiality agreement could mitigate this risk.
- Confidentiality Agreement / Non-Disclosure Agreement (NDA): sellers can deter potential buyers from publicly revealing sensitive information to which they become privy throughout the due diligence process by ensuring that those potential buyers sign confidentiality agreements. This can ensure companies (which may also be competitors) do not benefit from inside knowledge relating to the seller’s company if the proposed transaction falls through.
By Jake Schogger - City Career Series