Summary: Thorough investigation to assess risks, opportunities, and compliance before making business decisions.
Due diligence refers to a meticulous investigation into a company. This includes looking deeply at its abilities, weaknesses owned assets, financial background, etc.
Due diligence helps while making important business decisions like investing money, buying a product or service, merging with another firm, making an acquisition, or even sizing up the market value of your own firm.
Why Do We Do Due Diligence?
The necessity of due diligence can be broken down into these core reasons:
- It allows us to validate the accuracy of information shared about a pending deal.
- It helps unmask additional valuable facts that could steer decision-making.
- It’s the key tool to spot any lurking risks, thereby preventing undesirable business decisions
- It gives assurance that any transaction sticks to legal and governmental guidelines, helping avoid any regulatory pitfalls.
Diving Deep into Different Facets of Due Diligence
Contrary to what some might think, due diligence isn’t quick —it demands time. Since it covers so many areas, the entire process could easily take anywhere from a month to two. Some of the major aspects covered include:
Understanding a company’s business blueprint and the intent behind a proposed transaction gives a real insight into the company’s market positioning and its short and long-term plans. This helps you evaluate what the company’s future might hold.
Financial insight is a key part of due diligence. This involves ensuring that the company under scrutiny has been upfront about its financial status. This analysis involves going through past audit reports, current financial statements, details of debts and credits, stock inventory and even projected financial outlooks.
Human resources are invaluable to any firm. Thus, due diligence involves examining employee details, current vacancies, job roles and descriptions, contracts, salary scales, bonus structures, leave allowances, termination clauses, etc.
A company’s physical assets, like land, buildings, and machinery, and perceived ones, such as goodwill, brand value and trade secrets, get checked and accounted for.
This involves a thorough understanding of the company’s tax history. Any tax returns, unpaid taxes, existing dealings with IRS, and available tax benefits all fall under this part.
For a smooth business journey, meeting all legal requirements is crucial. Therefore, legal, due diligence looks at documentation related to company registration, AGM and board meeting records, loan and credit agreements, shareholding certificates, existing or potential legal disputes, and more.
Intellectual Property (IP) Rights
Intellectual Properties are treasures in today’s cutthroat business environment. Ensuring that patents, copyrights, trademarks, permits, licenses, etc., are in place and free from infringements is an essential part of due diligence.
Due diligence can even extend to cover other areas such as environmental policies, IT systems, marketing approaches, and R&D projects based on the nature and complexity of the business.