Due diligence isn’t as complicated as looking at the elements of a transaction from all angles to ensure content relevance.
In general, Due Diligence is the assessment of the risks and opportunities of a proposed transaction, be it the acquisition of a business or the conclusion of some other arrangement.
An example of Due diligence in a real estate transaction is conducting a building inspection and claiming title as a condition of buying a home.
Dating and getting to know each other before marriage is also a form of In-depth Due Diligence (nowadays, we can find tons of trivia about the person you are going to date on Google Search or other websites like: Twitter and Facebook pages, etc.).
Most used car buyers insist on taking a test drive first, checking the ownership papers, hiring a mechanic to come see the car and ask for advices from people who have owned the same car. This is considered natural when buying a car and is part of the Due Diligence process before we actually cash in.
By comparison, why wouldn’t a potential franchisee or business buyer want to do the same when starting a business for the first time?
Unfortunately, many franchisors can cite examples of some franchisees who were too eager to get into the system and then proceeded with or without an In-depth Due Diligence – as a result. Their business activities did not meet expectations, leading to the franchisor and franchisee having to terminate their cooperation.
Here are some other definitions of Due Diligence to help potential franchisees understand the concept:
– The process of researching a potential investment opportunity.
– Is the element of caution that a prudent person should have before making a transaction.
– An assessment of the desirability, value and potential of an investment opportunity.
– Is a basic research to determine the purchase worth of an acquisition.
Who is responsible for conducting the Due Diligence
The prospective purchaser is responsible for performing due diligence. While disclosure is required by law under the Franchise Code of Conduct, franchisors are not required to ensure that the franchisee actually conducts Due Diligence.
Even where the law provides for disclosure obligations under the Code of Conduct, the purchaser should seek to independently verify the information provided to him or her, as thoroughly as possible, in order to minimize the risk of decision-making. purchase decisions based on misleading, outdated, or incomplete data.
Buyers will typically seek for expert advices during the Due Diligence process. Professional advisors will include accountants (to assess financial matters and data), attorneys (to assess legal, contractual and compliance matters) and other qualified professionals. related to the industry or market sector in which the business operates.
Regardless of whether or not an advisor is employed, the acquirer is ultimately responsible for the decision to invest in the business offered for sale. The Buyer is solely responsible for the investment decision and for the completeness of the Due Diligence process, on which such investment decision is made.
Buyers insure their own interests
In any commercial transaction, the buyer has the choice to continue or stop the transaction. The seller is expected to secure his own interests to get the most benefit from the transaction and similarly, the buyer will too.
However, those looking to acquire small businesses or franchises have little or no prior experience in making such transactions. As a result, they have a vague or vague understanding of Due Diligence, and instead rely solely on accountants and attorneys and the truthfulness of information provided by the franchisor.
Unfortunately, without a thorough understanding of the elements of a thorough Due Diligence process, buyers will be limited in their ability to protect their own interests. They may miss professional advice in the first place or don’t understand the advice given. More importantly, they may not be able to verify the information provided by the franchisor and rely on unverified details.
If the buyer does not secure their own interests, they cannot expect that their advisor or the seller will do it for them.
In-depth Appraisal Fees
There are at least two types of costs associated with conducting an In-depth Due Diligence: hard costs and soft costs.
Hard expenses are cash outlays that can be of great value. This requires an investment of time and cash to research information and to pay advisors. The Franchise Advice Center recommends that potential franchisees be prepared to pay at least two to five percent of the cost of franchising for Intensive Due diligence alone.
In other words, if the franchise is worth $100,000, the potential franchisee should be willing to spend $2,000 to $5,000 on an In-depth Due Diligence. If, after conducting the due diligence process, the buyer decides not to proceed with the transaction, the due diligence costs will be significantly less than the possible losses the buyer would incur if it continued. business and then fail.
To date, in any Due diligence process, the cost of professional advisors (e.g. accountants, lawyers and other professionals hired to conduct their professional work) has always accounted for a large proportion. highest weight. These advisors will typically be paid by the hour or by project, and so that means the larger the investment, the more In-depth Due diligence is required, the higher the cost of the advisor.
Obviously, professional advisors working for a buyer will claim compensation regardless of whether or not the buyer completes the sale.
While this may result in the buyer “losing” the cost of Due Diligence due to failure to complete the sale, this could be a very small “loss” compared to the cost of purchasing an operation. inappropriate or unsustainable business practices.
Soft cost is the time cost of the buyer. Time spent researching a business is not something a buyer can expect to be paid for or deducted from the purchase price of the business.
The buyer will invest time and effort in reviewing the transaction, and if the transaction is not completed, the buyer will at least be better prepared and more experienced to perform the Professional Due Diligence process. next depth.
Typically, prospective franchisees should invest $1,000/hour in an Intensive Due diligence soft cost as an investment in the business.
This money can be spent researching a specific business opportunity as well as research on the industry and the business in general and will ensure a reasonable amount of time to assess the risks and opportunities of a trade. suggested.
Verify disclosed information
Potential franchisees will primarily rely on the data provided in the franchisor’s disclosure records and should attempt to verify each item in this record separately to ensure that the data is presented. The information presented is the most current, up-to-date and accurate information. It is important to keep in mind that the records of disclosures under the Code are required to be updated within four months of the end of the financial year (for most systems this will be October 31st). for a 12-month period from July of the previous year to June of the current year).
Therefore, if a record of disclosure is received in July, August, or September in any given year, the franchisee may be reading the previous 12 months or older.
If this is the case, the prospective franchisee may request a newer record of disclosures or delay making a purchase decision until the disclosure record is updated.