Due diligence: A must in modern business

Due diligence is a set of steps taken to review a business before entering into a transaction. It is essential for the assessment of risks and potential rewards involved with intended investment, business acquisitions, mergers or partnerships. Understanding all aspects of the due diligence process will help you make informed decisions and minimize financial, legal and reputational risks.

Project due diligence involves a thorough review of a project and investigating all aspects of the project activities. This is usually a combination of financial, legal, tax, technology, operational and market analyses. Due diligence is usually conducted when it is necessary to make sure that it is advisable and worth to invest in a particular company. Due diligence findings will give you an idea of whether the target business meets your expectations as a buyer or investor and of the risks that may occur after the closure.

These objectives of due diligence can only be achieved by a comprehensive approach to search, which usually includes the aspects listed below.

Financial analysis

Financial due diligence involves reviewing all financial statements of the company, including the balance sheet, income statement, and cash flow statement. In addition, the analysis encompasses long-term and short-term liabilities, accounts receivable and accounts payable, a track record of financial results over a few years, and net worth of the business. 

Legal review

Legal due diligence of an entity involves verification of all its licenses, intellectual property rights, contracts with its business partners, and employment contracts, and assessment of legal risks, such as potential lawsuits or adverse effects of any pending litigation. This type of due diligence is designed to assure that the target has no hidden liabilities and its assets are legally clean.

Tax audit

In simple words, tax due diligence of a company can be described as assessing its tax history and identifying any current and potential tax liabilities. The essential objective of this portion of the due diligence process is to understand whether the business pays taxes in compliance with applicable laws and whether it has any taxes due.

Market analytics

Delivering high quality due diligence requires a special focus on market research. It serves to assess the company’s position in the industry, its competitiveness, growth potential, and possible risks. Besides, it provides an analysis of customer needs, competition, and general market trends.

Technology review

For tech businesses and startups, it is particularly important to review their IT infrastructure, software, databases, and patents. Technical due diligence helps assess not only the current status of technologies, but also their potential for future innovation.

Operational risk identification

Operational due diligence of a business helps assess the effectiveness of its internal processes, quality of management, dependence on key employees, the condition of its production facilities, and technology risk.

Corporate culture assessment

An important aspect of the due diligence service is to review the company’s corporate culture and management practices to make sure that these are in line with standards and meet expectations of the buyer or investor.

Now, as we have discussed the ways of conducting due diligence, it is time to sum up its benefits for business process participants. Due diligence is essential for sale transactions, investment, and strategic partnerships, greatly benefiting all parties involved. The main benefits are as follows:

1. Minimization of risk. The main benefit from a due diligence review is that it thoroughly verifies and identifies potential risks involved in the transaction. When aware of financial, legal, operational, market, and other risks, the parties involved can timely take action to mitigate or remove them.
2. Evaluation of assets. The purpose of due diligence is also to determine the real value of the target business or assets. This is important for establishing a fair transaction price and protecting the interests of the buyer and seller.
3. Legal protection. The legal component of due diligence ensures that all necessary documents, licenses and permits are in order and that the business is not involved in legal proceedings that could affect its value or operations.
4. Integration planning. An understanding of the target’s internal processes and corporate culture is helpful for effective integration after the closure. This is particularly important for M&As, where synergy and compatibility of systems and teams are critical for success.
5. Transparency and trust. Due diligence makes a transaction more transparent and improves trust between its parties, enhancing their positions in negotiations and helping to avoid disputes and conflicts.
6. Identifying hidden opportunities. A review helps detect hidden opportunities for business growth and expansion, such as prospective markets, potential new products or cost reduction areas.
7. Informed investment decisions. Due diligence provides investors and buyers with all information required to make a well-considered and grounded decision to buy, invest or enter into a partnership, making negative surprises less likely.

The bottom line is that when it comes to defining due diligence in layman’s terms, it can be rightfully considered an integral part of any significant business transaction, because it contributes to its success by means of thorough preparation and comprehensive analysis.  The cost of due diligence will depend on the depth of analysis and professional competence of service providers.

If you want to learn more about your potential partners and assess the prospects and risks of engaging in various activities with them, experts at SEVEN SENSES will help you with this. We will collect, analyze and systematize information about the company of your interest as part of our Business Partner/Customer Audit service to make sure you feel confident and comfortable in cooperating with them.