Due diligence

What due diligence means

Due diligence is the careful examination of a business before a purchase or an investment. The term means not a single check but a bundle of examinations from several angles. The goal is to know the state of the business before a price becomes binding. Coming from the common law tradition, the term is now common in German mid sized business too.

Which areas are examined

Five areas are typical for an online shop. The commercial examination looks at revenue, contribution margin, cost structure and the development over several years. The legal examination reviews contracts with suppliers, service providers and staff, plus trademark rights and ongoing disputes. The tax examination clarifies open obligations and the treatment of past years. The technical examination assesses shop system, integrations, data quality and open technical debt. The customer examination looks at the customer base, repeat rates and dependencies.

Which documents have to be ready

• Figures: annual accounts, management reports and an analysis by contribution margin, not only by revenue.
• Customer structure: share of regular customers, distribution by channel and value, plus development by customer group.
• Contracts: suppliers, agencies, software subscriptions, rent and loans, each with term and notice period.
• Technology: system landscape, open defects, dependence on individual providers and how easily each can be replaced.
• Staff: employment relationships, key people and whether knowledge is documented.

How long it takes and who takes part

For a shop of this size a full examination takes some weeks depending on scope. It ties up time on both sides, because documents have to be compiled, questions answered and evidence supplied. Anyone conducting it themselves needs capacity for it, which is why specialists are usually involved in practice.

For the seller it matters that the documents are prepared. An examination stalled by missing evidence is a price driver in negotiations, because it creates doubt.

Which findings change the price

Five findings affect the price directly. First revenue that hangs on individual campaigns or on one person, because it is not repeatable. Second missing documentation of processes, because then every new owner starts from scratch. Third legal risks from unresolved labelling duties. Fourth technical debt, such as an outdated shop system or missing integrations. Fifth legacy burdens from taxes or contracts.

The order is not severity but provability. Well evidenced findings affect the price more strongly than suspected ones, which is why a clean examination pays off for both sides.

Frequent questions

• Examination before or after agreeing a price? First a non-binding price range, then the examination, then the binding price.
• Who pays for it? Usually the buyer.
• What is the key figure? The recurring contribution margin per customer group.