Due diligence is a term used to describe high-stakes transactions like home purchase or business acquisitions. However, it’s also a method of giving a project or activity the attention and consideration it deserves, whether you’re signing a contract, examining an application in the cloud or even deciding where to dine next Saturday. Due diligence is crucial since we are constantly doing it when we weigh the benefits and risks when deciding on an upcoming restaurant, downloading a new application, or signing up to newsletters.
What is due diligence, then? It’s basically the extensive research and investigation that parties do prior to the completion of a deal, to verify facts and financial details as well as to review the risks that could be involved and prepare for integration after the deal. Due diligence is an essential part of almost all M&A activity, and it’s also a crucial element of corporate governance and compliance.
Due diligence is a risk-management strategy that must cover all aspects of a company’s operations. This covers customers, third parties and, perhaps most importantly, the business itself. Legal or regulatory mandates often require due diligence which include investigations of a customer’s ties to sanctioned countries and industries as well as identifying politically exposed people (PEPs) as well as assessing a company’s exposure to the risk of terrorist financing and money laundering and confirming the legitimacy of a company’s business model.
Companies conducting due diligence can employ a variety of experts to help them investigate and analyze the information. In a M&A deal, an investment firm might employ a team to evaluate the company’s competitive position and market share, as well as future growth prospects. An accounting firm may conduct forensic audits in order to discover the omissions in financial statements as well as tax reporting.
Prioritizing your requests is essential during due diligence. Focus on the areas that are of the greatest importance to you and your clients. A prospective investor looking to evaluate the performance of a manufacturing facility may be more concerned with its operational performance and safety record while a purchasing company may place more focus on the company’s labor standards and bribery/corruption standards.
Using an integrated due diligence platform can help simplify and make it easier to manage large volumes of documentation and research. These platforms are secure, central repositories that organize the storage, sharing, and distribution of information. They also support collaboration and communication between the many people who are involved in a project, and enable the assignment of tasks, tracking progress, and decision-making, regardless of where people are located around the globe. They can even support automated tasks and workflows, which can enable document indexing, version control and other features that comply with the requirements. They can also reduce the amount of time and expense involved in due diligence by reducing or eliminating the manual processes.
