Page 233 - AAA Integrated Workbook STUDENT S18-J19

Due diligence

Due diligence

1.1 Definition

Due diligence: A fact finding exercise usually conducted to reduce the
risk of making a bad investment.

1.2 Purpose

An advisor is engaged by the acquirer of a company to gather information on the
target company. This information may:

 Reveal potential problems before an acquisition decision is made.

 Provide the client with the information they need to decide

– whether or not to go ahead with an acquisition

– when to go ahead with the acquisition

– how much should be paid for the target company.

 Increase stakeholder confidence in the acquisition decision, for example, if the
acquisition is to be financed by a bank loan. The bank will have greater
confidence that the investment is sound and the loan is more likely to be repaid.

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