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Due Diligence
When you buy a Company, you don't only inherit its customers and revenue, you also inherit its contracts, debts and employees too. If you don't look before you leap, you won't know where you land. We uncover insights before the marriage of two businesses so that an ugly separation can be avoided.
- Quality of earnings A high revenue and/ or growth rate may be hiding poor quality earnings. Using unreasonable discounts or abusive sales practice, e.g., channel stuffing, abuse of rebates, abuse of return policies and etc. is an indicator that the Company's performance is not sustainable. When selling a Company, sellers are incentivised to inflate their financial performance to paint a brighter picture;
- Unfavourable contract terms Contracts that are entered into by the Company are still legally enforceable even when the directors and shareholders are no longer the same. Contracts may have prices which are no longer reasonable, and the commitment to these terms can translate into heavy losses. It is always better to find out about these and getting the seller to renegotiate terms before taking over, or factor in the expected losses into the sales price;
- Collection issues The receivables of a Company plays a huge factor in the valuation. Some receivables may be difficult to collect, or even no longer exists, and thus should be discounted for accordingly;
- Undisclosed liabilities The accounting record may fail to take up outstanding amounts owing to suppliers. A due diligence examine records after the takeover date to identify if any such liabilities exist. Unsatisfied charges could also indicate the existence of loans which may be left out in the accounts of the Company; and
- Headcount matters Employment contracts are also binding on the Company. A situation of overcapacity may lead to lay-offs that would also mean heavy compensations. It would also be useful to know if key management personnel have any intention to resign directly after the takeover.