Due diligence is used to investigate and evaluate a business opportunity or an individual proposition. The term due diligence describes a general duty to exercise care in any transaction. As such, it spans investigation into all relevant aspects of the past, present, and predictable future of the business of a target individual or corporate entity. it ultimately translates into basic commonsense success factors such as “thinking things through” and “doing your homework”.
There are many reasons for conducting due diligence, including the following:
- Confirmation that the business or person is what it/they appear to be;
- Enable you identify potential “deal killer” such as information which, if you would were ordinarily aware of, will dissuade you from entering business transaction or personal relationship;
- Gain information that will be useful for valuing assets, defining representations and warranties, and/or negotiating price concessions; and
- Verification that the transaction complies with investment or acquisition criteria.
Backgroundseeker.com partners with law firms, law enforcement , registries, credit bureaus ,employers, bankers, governmental and nongovernmental institutions, and other professionals involved in the management and provision of information required for purposes of due diligence.
Due diligence should commence when a business opportunity/proposal is first broached and continue throughout the talks. There should be no binding agreement or exchange of valuable information without first verifying the identity and reputation of the parties you are entering into a transaction with.
The parties conducting due diligence generally create a checklist of needed information. Management of the target company prepares some of the information. Financial statements, business plans and other documents are reviewed. In addition, interviews and site visits are conducted. Finally, thorough research is conducted with external sources — including customers, suppliers, industry experts, trade organizations, market research firms, and others.
There is no correct answer to this question. The amount of due diligence you conduct is based on many factors, including prior experiences, the size of the transaction, the likelihood of closing a transaction, tolerance for risk, time constraints, cost factors, and resource availability. It is impossible to learn everything about a business but it is important to learn enough such that you lower your risks to the appropriate level and make good, informed business decisions.
There is a risk that a certain highhandedness in due diligence proceeding may result in the subject losing interest in the transaction or proposal. It may also result in “analysis paralysis” that prevents you from completing a transaction or provides time for a better competing offer to emerge. Accordingly, it is important that due diligence be prioritized and executed expeditiously. Appropriate investigation and verification into the most important issues often must be balanced by a sensible level of trust concerning lesser issues. At Backgroundseekers.com we aim to deliver this result as quickly as we possibly can.
Because of the lack of reliable databases in the particular jurisdictions we cover, we have to resort to physical searches which means that time allocated for completion can vary widely with each situation. Ideally we would strive to give you a timeline as we determine the cost of the operation and the extent of work required, this would usually be within a 14 day window from start to completion but where schedules through the closing of a transaction are tight – you should ensure that due diligence commences early.
Every transaction will have different due diligence priorities. For example, if the main reason you are entering into business with a company is to import cash crops to your own market, then your highest priority task is to ensure that the product is near harvest season, your partner has access to that product, and that there are no major regulatory or financial obstacles to conclusion. In a different relationship, the highest priority might be to ensure that the person proposing to you or who you intend to send a travel document is a real person who is not committed to another relationship.
Due diligence costs are based on the scope and duration of the effort, which in turn are dependent on the complexity of the target entity. Costs are typically viewed as an essential expense far outweighed by the anticipated benefits and the downside risks of failing to conduct adequate due diligence. Because of the nature of the jurisdictions where electronic records are not necessarily available, fraud is rife, law enforcement is not above reproach; costs are much higher than typical database searches in more developed jurisdictions.
Certain activities conducted during due diligence can breach confidentiality that a transaction is being contemplated or an entity is being investigated. For example, contacting a distributor to assess their satisfaction with the target company’s products might give credence to a rumor that the company is up for sale. Accordingly, to maintain confidentiality, we often conduct our investigation under different guises to mask the intention of the enquiry.
A well-run due diligence program cannot guarantee that a business transaction will be successful. It can only improve the odds. Risk cannot be totally eliminated through due diligence and success can never be guaranteed.
In this litigious world, you can be sued for just about anything and failing to conduct due diligence is no exception. Parties involved in a business transaction may find themselves being sued by their clients, investors, customers, employees, suppliers, or other third parties asserting failure to conduct proper due diligence or pursuing a liability that was overlooked or incorrectly assessed by due diligence.
No. However, conducting proper due diligence may serve as a strong legal defense to third-party claims after a transaction closes. Due diligence may also reduce legal issues by alerting a purchaser or investor to potential liabilities that can be mitigated in various ways prior to closing the transaction.