The Crucial Role of Due Diligence Investigation In Major Investment and Acquisition

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.