The term “due diligence” is usually associated with high-risk large-ticket transactions, such as home purchases or business acquisitions. It’s also a way of giving a project the attention and care it deserves whether it’s signing a contract or examining a software program, or even choosing the best place to eat on a Saturday. Due diligence is important because we do it constantly by weighing the benefits and risks when deciding on a new restaurant, downloading a new app, or signing for a newsletter.
What is due diligence, then? In short, it’s the extensive investigation and research that parties conduct prior to the completion of a deal, to verify facts and financial data, review potential risks, and prepare for integration post-deal. Due diligence is an essential element of almost all M&A activities, and it’s an essential element of corporate governance and compliance.
Due diligence is a continuous risk management plan that should be applied to every aspect of a firm’s operations which includes customers, other parties, and most importantly, the company itself. Due diligence is often required by regulatory or legal requirements. This includes investigations of the connections of a client to sanctioned countries and sectors, identifying politically-exposed persons (PEPs) and assessing the company’s risk of money laundering and terrorist financing as well as confirming the integrity a business model.
Companies that conduct due diligence could employ various experts to help them investigate and analyze the information. In a M&A deal the investment company may employ a team of experts to analyze the company’s competitive position, market share, and future growth prospects. Accounting firms can conduct forensic audits in order to detect irregularities with the financial statements and tax reporting.
Prioritizing requests is important during the due diligence process. Only investigate those areas that are of the greatest importance to you and your clients. For example an investor evaluating manufacturing companies may be more interested in the facility’s operational performance and safety record, whereas a buying organization will likely put more importance on a discussion of the company’s labor practices as well as corruption and bribery standards.
A due diligence platform that is integrated can streamline and simplify the process. This allows you to manage large volumes research and documentation. These platforms are secure central repositories which organize and store information. They also facilitate collaboration and communication between the many participants in a project, and enable the assignment of tasks, progress tracking and decision-making regardless of where people are located around the world. They can also support automated tasks and work flows, enabling document indices, version control and other compliance-friendly functions. They can also reduce the cost and time of due diligence process by cutting down or eliminating manual procedures.
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