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Chapter 15 4

Due diligence

3.1 Definition

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

3.2 Purpose

 An advisor is engaged by the potential acquirer of a company to gather
information on the target company.

 The main purpose of due diligence is to ensure the acquirer has full knowledge
of the financial performance and position, operations, commercial and market
position of the target company.

 The aim is to reveal any potential problems before a decision regarding the
acquisition is made.

 Due diligence provides the directors of an acquiring company with the
information they need to decide whether or not to go ahead with an acquisition;
when to go ahead with the acquisition; and how much should be paid for the
target company.

 Due diligence can increase stakeholder confidence in the acquisition decision,
for example, if the acquisition is to be financed by a bank loan, the bank has
confidence that the investment is sound and the loan is more likely to be repaid.

 Due diligence may either be conducted as an assurance assignment (where a
professional conclusion is expressed) or an agreed upon procedures
assignment (where the accountant presents the client with factual information
they have requested about the target company).

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