“Research is what I’m doing when I don’t know what I’m doing” – Wernher bon Braun
Before signing a contract or making an investment without proper investigation, it is normal to have doubts. The plus side is that there are techniques and habits that can be learned, and double checking your work is the first of them.
The due diligence process is an action that is considered reasonable for people to be expected to exercise in order to keep themselves or others and their investments/properties safe.
According to Business Dictionary there are 4 ways to define the due diligence process depending on the context:
- General: Measure of prudence, responsibility, and diligence that is expected from, and ordinarily exercised by a reasonable and prudent person under the circumstances.
- Business: Duty of a firm’s directors and officers to act prudently in evaluating associated risks in all transactions.
- Investing: Duty of the investor to gather necessary information on actual or potential risks involved in an investment.
- Negotiating: Duty of each party to confirm each other’s expectations and understandings, and to independently verify the abilities of the other to fulfill the conditions and requirements of the agreement.
In brief, the due diligence procedure is a detailed examination undertaken before signing, whether we talk about a business arrangement or a simple acquisition transaction.
Where do you start? Certainly, we do not refer to Tony Bennet’s song “Where do you start” written by Johnny Mandel in 1987 but at the start of due diligence implementation.
The three main categories of due diligence are legal, financial and commercial. Although these have traditionally been distinct, the best due diligence processes maintain an element of close cooperation as the work in one area can often inform the checks being carried out elsewhere. Many practices now offer an integrated service that brings these strands together.
You need to think at due diligence as the phase of emphasizing the risks inherent with investing; before getting excited about the deal have clarity of purpose and company goals early in the process.
For instance, if you are trying to acquire a company, due diligence is a critical process that cannot be overlooked. The process involves carrying out a thorough investigation such as an audit of a company’s financial and accounting situation before investing/acquiring that company. A company will be analyzed in detail through the due diligence process, from all points of view: financial, commercial, operational, legal – to highlight the real situation faced by that company as well as the benefits or risks of an investment.
Furthermore, through the due diligence process, you can spot potential deal-killers/shapers and provide assurances that the acquisition is the right decision at the right price.
After a proper valuation of the target company you can have a complete, accurate, and multifaceted picture of the company’s risks and potential.
Once you’ve completed these basic steps you can make the right decision and determine if the investment is worthwhile for your business portfolio.