11. Due Diligence

Due Diligence can be loosely translated as an in-depth audit. It serves to enable the prospective buyer to understand the seller's business operations as thoroughly as possible and thereby obtain confirmation of the information provided so far. The buyer seeks to capture and evaluate all risks associated with the company. They are typically assisted by experts such as tax advisors, accountants, and lawyers, sometimes also by industry and financial specialists. These experts are responsible for evaluating the submitted documents. Similarly, the person in charge of Due Diligence within a company is accountable to the company's shareholders to ensure nothing important is overlooked. Therefore, the utmost caution is warranted.

Due Diligence is naturally very extensive, because no aspect should be overlooked. The checklist of required documents and information is very comprehensive. This applies especially to share transfer transactions, where the buyer typically assumes all assets and liabilities on the balance sheet, particularly debts. In the case of asset purchases, the audit usually relates only to the documents associated with those assets. In most cases, however, not all processes are complete and verifiable. Therefore, due to these deficiencies, the buyer requests warranties from the seller, which are anchored in the subsequent purchase agreement, but this often logically leads to disputes between the two parties.

It is therefore understandable that all relevant operational documents are examined, i.e., all contracts and obligations including employee employment contracts, tax documents such as tax returns, results of tax audits and company audits, as well as insurance contracts. The same applies to items on the asset side. These include, among others: existing receivables and their quality (aging), inventories, assets, buildings and equipment, patents, etc. All this information is necessary to verify the economic situation of the company being sold.

Depending on the complexity of the entire company, the review can be very extensive and time-consuming. Some potential buyers exaggerate their Due Diligence requirements, for example by presenting a large group of consultants for a small company often with a single owner. In most cases, this is truly not necessary. A small business is usually very transparent, and the review should be completed within a few days.

Due Diligence is a very sensitive matter for the seller, as during the audit period, employees are usually not informed about the sales intention. Therefore, it is often advisable to conduct the review personally, for example in the accountant's office or in a meeting room. Nowadays, it is also common to send the required documents (documents and contracts) through a special virtual server. In such cases, the potential buyer receives access rights that allow them to view the document contents. However, access rights should be limited to visual inspection only, without the ability to print. Even in standard Due Diligence, the buyer cannot and must not make copies of the submitted documents. Having a virtual data server also has the advantage of allowing multiple buyers to review documents simultaneously without having to be physically present at the company or even running into each other.

If the Due Diligence is completed satisfactorily, there is usually nothing standing in the way of concluding the purchase agreement. In practice, however, it is common that after the review is completed, the buyer tries to push the price down further. There is almost no Due Diligence in which one or even several negative facts are not found that could be considered particularly risky. This is also due to the responsibility of the auditors, who bear the risk of their assessment and tend to be rather stricter and more cautious. As a result, attempts to reduce the purchase price frequently occur, or at least a temporary suspension of payment of part of it as a certain reserve against the identified theoretical risk. In a specific case, it is determined whether these demands from the buyer are justified or the risk is considered customary (trivial). However, if agreement cannot be reached, an uninvolved third party helps with the assessment. Consultants on both sides cannot perform this role because they are not neutral but act on behalf of and unilaterally in favor of their clients.