Due Diligence and Its Importance
You might be asking, “How important is performing the proper due diligence on employees, vendors, or customers?”
To be able to answer this question, you have to ask yourself, “What are the potential downfalls of if I deal with this person or company if they turn out to have bad credit history, are litigious, or dishonest, etc.?”
The Answer: It can cause a lot of pain, both emotional and financial, and it also costs you a lot of time. It can also put you, your colleagues, as well as your organisation under tremendous stress.
Due diligence is used to evaluate and investigate a business opportunity. It traditionally flags the legal risks that might emerge from a company’s financial obligations or contracts. It spans into all relevant aspects of the past, present, as well as the predictable future of a target business or person.
There are many reasons as to why due diligence must be conducted:
- Confirmation that the business or person is what it/they appear to be;
- Identification of potential “deal killer” defects in the target;
- Avoidance of bad business transactions;
- Gain information that will be useful for defining representations and warranties, valuing assets, and negotiating price concessions; and
- Verification that transactions comply with investment or acquisition criteria.
However, it should be clarified that a due diligence review is NOT AN AUDIT nor a valuation of the target company or person. Due diligence has common procedures and has overlaps with audit in terms of procedure and purpose. The difference, however, is that due diligence is a thorough investigation that focuses on key information that has been asserted to a company or person.
WHEN IS DUE DILIGENCE CONDUCTED
Initial data collection and evaluation commences once there is a business opportunity and this continues throughout the talks. Typically, a thorough detailed due diligence is conducted after the involved parties have agreed in principle that a deal will be pursued and once a preliminary understanding has been reached, but prior to the binding contract signing.
HOW IS DUE DILIGENCE CONDUCTED
The parties who will conduct due diligence creates a checklist of needed information. Management of the target company will prepare some of the information. Business plans, financial statements, and other documents will also be reviewed. Interviews and site visits are also conducted. External resources such as suppliers, customers, industry experts, market research firms, trade organizations, and others, are also included in the thorough research.
If you are interested in this service or if you have some questions that you want answered about due diligence, visit our website today or contact us at 1.888.498.4500! We’d love to talk to you.