Due diligence ensures that everyone is informed about any potential transaction. In this way, they are able to assess the risks and benefits of moving forward with an agreement. Conducting due diligence can avoid unexpected surprises that may derail the deal or create legal disputes after closing.
In general, companies conduct due diligence prior buying a business, or merging with another business. The process is typically divided into two parts including financial due diligence and a legal due diligence.
Financial due diligence involves analyzing the company’s assets and liabilities. It also examines the accounting practices of a company and financial history, as well as compliance with the law. During due diligence, many companies will ask for copies or audits of financial statements. Other areas that require due diligence include supplier concentration and human rights impact assessment (HRIA).
Legal due diligence is a method that examines the policies and procedures of a firm. This involves a thorough examination of the legal status of the company in compliance with the law and regulations, as well as any legal liabilities or disputes.
Due diligence can take up to 90 days or more, depending on the nature and scope of the acquisition. During this time, both sides usually agree to an exclusive period. This stops the seller from soliciting other buyers or pursuing negotiations. This is beneficial for sellers, but it can also backfire if the due diligence process is not done correctly.
One of the most critical points to be aware of is that due diligence is something that happens, not an event. It is a lengthy process and should never be rushed. It is crucial to keep open communications and, if feasible, to meet or exceed deadlines. It is essential to comprehend the reasons behind a deadline being missed and what steps can be taken to rectify the problem.