Due Diligence

Anyone thinking of purchasing the shareholding of Hereford United's Graham Turner and Joan Fennessy is likely to go through the process of due diligence before confirming any offer. And in the case of these shares, it's a little more complicated than just buying any old shares, as the purchase would result in the buyer having the largest single stake in Hereford United and therefore the probability of at least a place on the board, if not chairing it

So what is due diligence?

Due diligence is used to investigate and evaluate a business opportunity. The term due diligence describes a general duty to exercise care in any transaction. As such, it spans investigation into all relevant aspects of the past, present, and predictable future of the business of a target company. Due diligence sounds impressive but ultimately it translates into basic commonsense success factors such as "thinking things through" and "doing your homework".

Usually due diligence is carried out by specialists. Some business brokers offer this service as do accountants and some consultants.

However some buyers do their own due diligence especially when they think the business is straight forward or perhaps to save some cash.

Some questions that might be asked by any potential purchaser:

- Is there a clear description of the product or service?
- Does the product meet the needs of the target customers?
- Is there an expanding (or at least stable) market for the product?
- Who are the main competitors and how do they compare on quality/price/service?
- Are trading laws and regulatory requirements being met?
- Any recent bad publicity or adverse comments?
- Any issue with continuing relationships with suppliers or difficulty in getting raw materials, services, licenses or premises?
- Any large increases in rent, labour or other costs on the horizon?
- Is there any other large impending cost e.g. obsolete machinery or other capital requirement?
- Is there over reliance on a particular employee, supplier or customer?

Financial Questions:

- Is there an unambiguous and complete explanation of the revenue streams?
- How good are the cash flows?
- How accurate is the valuation of their assets?
- Are there any hidden liabilities?
- Are there any irregularities in the financial statements?
- What is the company's history with financial compliance?
- What have the auditors said about the company figures over the last few years?
- Have authorities conducted any tax related investigations into the company's finances?
- How reliable are the financial projections?
- Have terms and duration of the overdraft and other credit facilities been disclosed and is there any risk to those facilities continuing?

People Related Questions:

- What do background checks on the owners of the company reveal?
- Are staffing levels adequate?
- Are key employees staying?
- Does the firm's insurance include cover for key personnel?
- Is management/board of directors capable and experienced?
- Are any existing or ex-staff under any non-compete contracts?
- Have all profit sharing, deferred compensation and non cash earnings been disclosed?
- How easy is it to replace staff and/or find suitable people with the right skills?
- Do the employment contracts comply with existing legislation?
- Do proper record exist for all aspects of the HR function?
- Is the company up to date with all employee related taxes?
- Have you sight of all documents relating to loans, consulting etc.with officers, directors and related parties?

Legal Questions:

- Have all articles of incorporation, tax registration certificates, board meeting minutes, shareholding records etc been provided?
- Are there any pending legal cases or threats of action (and has potential damage been quantified)?
- Is there a history of past cases (do settlement documents exist)?
- Has all litigation related material been made available for inspection?
- Is there satisfactory evidence of ownership of Intellectual Property?
- Have copies of mortgage deeds, titles, leases etc. been provided?
- Are the accounts, regulatory filings and tax payments all up to date?

The above questions could relate to any business and for a football club there may be even more questions as Coventry Academic Dr John Beech recently mentioned.

•Who actually owns the company, and the ultimate parent company? (Well, OK, perhaps a bit tricky for, say, Leeds or Portsmouth)
•Has your largest shareholder ever been to see the club play?
•Can your largest shareholder locate your club within 50 miles on a blank map?
•Are you up to date with all your tax payments?
•Have you paid all your football creditors?
•Can you produce a written guarantee that your ‘soft’ debts will not be called in within the next five years?
•Is your wages-to-revenues ratio less than 60%?
•Do you have a fans’ representative on your board?
•Do you have a Plan B for when it all goes pear-shaped on the pitch?

Finally a cautionary tale.

Birmingham City was recently sold by David Sullivan and David Gold to Carson Yeung. It appears Yeung didn't use the due diligence process and then complained about financial problems.

He was said to be surprised at the money that had had to be paid on transfer and agents fees, bonuses, taxes and other bills.

Sullivan noted "He merely asked us about ten questions and failed to bring in accountants or auditors. It’s a bit like me buying a house and failing to conduct a survey and then moaning when the damn thing collapses".

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