Due diligence is a critical aspect of an investment process as any commercial investment or acquisition would be subject to legal, financial, or other risks. With due diligence, investors and buyers can assess the feasibility of investment and avoid any undue risk after the purchase. It is a technical process that allows validation and confirmation of all relevant facts, figures, and information, and it can be considered an investigative tool. It helps the purchaser or investor in being aware of all potential liabilities and financial aspects of investment and avoid nasty surprises.
Due diligence is an essential part of mergers and acquisitions. The acquisition process entails solid due diligence so that the buyer would be assured of correct expectations regarding the transaction. There are different types of due diligence. For example, legal due diligence involves checking whether the business has complied with all regulations, and it is not embroiled in any legal battle. Financial due diligence involves checking the company’s balance sheet and overall financial health. It also ensures that the financials provided by the target company are accurate and in order. Tax due diligence is conducted to check the significant tax exposure of the target company and to ensure that all tax liabilities have been cleared.
In-depth due diligence is recommended before any major investment or acquisition to:
Conduct a proper analysis of the financial history of the business to be sure that the business has been correctly reporting the numbers in its financial records
Highlight critical discrepancy, if any, between the actual and reported financial position of the business
Check for factors that could be potential deal breakers
Unveil contingent liabilities such as litigations (ongoing or potential), trade disputes, employee disputes, and undisclosed debts
Areas/parameters covered in a typical due diligence process include:
Shareholder objectives or reasons to sell the business
Historical and projected financials
Technology and patents involved
Strategic synergies
Customer base, backlogs, and sales pipeline
Management and operations teams
Past and ongoing litigations
Social and environmental factors
Overall, the due diligence process helps a buyer make an informed decision before making a strategic purchase. Information from due diligence can help buyers renegotiate or reconsider their decisions. As it is a crucial process, it is essential to have a team of professional advisors to conduct due diligence. Due diligence not only helps in making correct decisions but also protects the company from any future indemnification or risk due to bad investments or acquisitions.