Due diligence is the process of obtaining sufficient & genuine information about a business entity to help uncover each and every fact, circumstances or set of conditions that would have a reasonable likelihood of influencing a business decision, of a consideration and of a price to complete the transaction.
Due Diligence operates as a trustworthy tool to the investigation into the potential opportunities, SWOT analysis, auditing Intellectual property portfolios, evaluating tangible and intangible assets as an imperative for any transaction with another party (merger, acquisition, purchase, and sale), also providing best practices and thorough considerations before commencing of any enterprise or project.
One of the key objectives of due diligence is to reduce the possibility of there being unknown liabilities or risks to the maximum extent. The exercise is multifaceted and involves investigation into the business, financial, accounting, and legal aspects of an issuer.
WHY DUE DILIGENCE MATTERS?
Due diligence helps companies and investors to understand the nature of a deal, the risks involved in it, and whether the deal fits with their portfolio. Essentially, undergoing due diligence is like doing “Homework” on a potential deal and is important to informed investment decisions.
Due diligence answers – whether to make an investment? whether to perform merger & acquisition? what disclosure should be included in a document for the issue of securities? whether listed on a stock exchange? whether to lend finance to a borrower for a project or not? whether a party to an agreement is capable of performing its contractual responsibilities?
“Knowledge is Power”- due diligence ensures that there’s no knowledge imbalance.
Due diligence is especially important in those deals that need structured and outside funding. Deals or transactions that undergo due diligence process provides higher chances of success and avoid a negative outcome.
Major reasons why due diligence is conducted:
-To verify and confirm information that was brought up during the deal or investment process
-To identify a potential flaw in the deal or investment opportunity
-To obtain information that would be beneficial in valuing the deal
-To make sure that the deal or investment opportunity complies with the deal or investment criteria
From a buyer’s perspective
Due diligence provides evidence that helps the buyers to be more positive that expectations made regarding the deal are correct. In mergers and acquisitions (M&A), purchasing a business without doing due diligence increases the risk to the purchaser.
From a seller’s perspective
Due diligence also benefits the seller, it provides detailed understanding of issues and possible risks that buyer can see in the organization. Therefore, it’s not uncommon for sellers to prepare due diligence reports for themselves before potential transactions.
WHERE IT CAN BE PRACTICED:
Due diligence is typically under taken in business due to two main types of transactions, this include the sales or purchase of goods and services or when merging with or acquiring another corporate entity within each transaction. For avoiding any kind of issue or risks in a potential deal or transaction due diligence is practiced.
Here is a comprehensive list of where we should perform due diligence, either pre-agreement or once the partnership has been established:
-When you establish a new business or partnership with a client or third party, especially in a property sale
-When a party is suspicious of money laundering
-When it is necessary for existing customers to amend their information.
For example, their address or marital status.
-When carrying out an irregular or occasional transaction that is much larger than usual or may be flagged up as unusual bank activity
-If someone is a high-value dealer
Due diligence is never easy but it doesn’t mean that it is impossible to perform. Good due diligence requires accountancy skills, communication, attention to details, and time management (it should be performed within the given deadline).
There are multiple types of due diligence that provide businesses with the assurance and knowledge to get exactly what they want out of a prospective deal. We can bifurcate different types of due diligence into four main categories: general due diligence, due diligence in business, due diligence in investment, and due diligence in negotiation. Due diligence can be performed anywhere.
‘Due diligence is the beginning of risk-free business’