A process that is often bandied about nowadays is Due Diligence. But what exactly does this mean and when is this diligence actually due?
Due Diligence – is it really necessary?
These two very formal words actually just mean that an investigation audit or review needs to be conducted to check that the facts of the matter under consideration are accurate. This is nearly always required when there are different parties to a merger and acquisition, joint venture or investment – and they are about to do a deal. This makes definite sense as, well, you would like to know that the facts are verified as true and accurate – not so?
How long has Due Diligence been around?
Actually, a long time! In the USA in 1933 a Securities Act was introduced which stated that a seller of securities had to ensure that investors have enough information to be able to make an informed decision before they buy or invest. This has spread through many other business arenas and is commonly used so as to ensure that “reasonable care” occurs.
So why is it important?
There could be so many hidden risks in a financial transaction that it is normal for a purchaser to engage in due diligence on their acquisition. When doing this, the information provided by the seller is verified so any discrepancies can be immediately identified! Also, any information that has been left out by the seller, whether it was intentional or not, will be uncovered. This can save many headaches and heartaches later down the road.
So, due diligence clearly helps buyers and sellers to make informed decisions and, if necessary, to allow for lower prices to be paid because the higher the risk, the lower the price that will be paid – for the lower the value will be.
And who comes to the party? Well, usually the due diligence process will include the buyer, the seller, and sometimes the specialist.
And how does the process play out?
Many different specialists could be involved, depending on the complexity of the issue. One is a legal expert who will consider any current or potential legal liabilities. Of course, another is financial who needs to review financial information in detail. And possibly an operational specialist in order to understand the operational process of the business and to identify potential risks within the operations. An HR person may be included, and an IT specialist to identify potential risks such as security vulnerabilities, ownership or structure of proprietary technology and maybe custom software. Also, an environmental analyst who will identify environmental impacts and compliance to regulatory requirements, and thereby identify potential risk and associated liabilities.
Any final positive of doing due diligence?
Well due diligence increases the chances of a successful outcome because it can uncover any major risks or problems that need to be addressed or mitigated. In fact, there is even some research that shows that, the more time and effort spent on due diligence, the better outcome.
So, always do it – do due diligence!