Due diligence is the process of making sure that all participants in a transaction are informed. They can then analyze the risks and benefits of a possible deal. Due diligence can help avoid unexpected surprises that could sabotage the transaction or lead to legal disputes after its close.
In general companies conduct due diligence prior to buying a business, or merging with another company. The process typically comprises two main parts of due diligence on financials and legal due diligence.
Financial due diligence is the process of analyzing assets and liabilities of a company. It also focuses on the company’s accounting practices and financial history as well as compliance with the law. During due diligence, many companies ask for copies or audits of financial statements. Due diligence also includes supplier concentration and the human rights impact assessment.
Legal due diligence focuses on a company’s policies and procedures. This includes a review of the status of the company in terms of its legality in compliance with laws and regulations, as well as any legal disputes.
Depending on the nature of acquisition Due diligence can take up to 90 days or more. During this time, both sides usually agree to an exclusive period. This stops the seller from seeking out other buyers or continuing discussions. This is beneficial for a seller however, it could backfire when due diligence is not properly executed.
It is crucial to remember that due diligence is not an event, but rather a process. It is a lengthy process and should never be completed in a hurry. It is important to maintain open communication and, if possible to meet or exceed deadlines. If a deadline is missed It is important to identify why and what steps can be taken to resolve the problem.