How to Conduct Due Diligence

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Due diligence is the research and analysis that a company or organization will perform in preparation for a business transaction. Particularly when a business opportunity arises, conducting due dilegence means investigating and evaluating that opportunity and exercising care in the transaction. Due diligence basically means using common sense, doing your homework and thinking things through before investing time and money in an opportunity. These steps will help.

Things You'll Need

  • Common sense
  • Foresight

Conducting Sound Due Diligence for your Business

Determine the parties that will conduct due diligence. Consider the nature of your business, staff organization and the business opportunity under consideration when considering such parties. Involve lead investors, corporate/business development staff, legal staff (attorneys), financial staff (accountants), loan officers, investment bankers and loan officers where appropriate. Determine those positions that may already have an obligation to conduct individual due diligence. Contract with third-party consultants to conduct due diligence as desired.

Create a checklist of needed information. Consider what materials or data are necessary to evaluate the conditions of the potential investment. Place all of the needed information on the checklist so that nothing is overlooked or forgotten. Prioritize the items on the checklist to meet your business objective.

Suggest that the management of the target or partner company provide some of the necessary information. Request that they provide company information regarding their activities, accomplishments, products, performance and/or results.

Review financial statements, business plans and other related documents. Conduct interviews and site visits where possible. Collect third-party validation about the target or partner company from stakeholders, donors, funders, and field experts (local and/or international) when such validation is both relevant and advantageous.

Conduct research through other, external sources, such as customers, clients and suppliers. Consider researching external sources like trade organizations and market-research firms.

Select random samples of projects and evaluate the selection for information. Check references of the target or parnter company. Evaluate additional available data, such as previous advertising or marketing campaigns.

Tips & Warnings

  • Know your business practices, financials and inventory well. Only then can you be confident in the due-diligence priorities you set for exploring a potential investment.
  • Take the opportunity to determine where you can save money. Business opporunities always involve their own costs. Saving money (where possible) in conducting due diligence will contribute to the potential for a successful transaction.
  • When determining what information and materials will be necessary to conduct due diligence, ask yourself about the benefits and costs of each. Some information may at first seem desirable but prove to be too challenging or expensive to obtain. Recognizing this before you begin will increase the chances for productive due diligence.
  • Don't focus soley on how a business or product has performed historically. Due diligence that ignores the future potential to be derived from the investment will have too narrow a focus to support sound due-diligence practices.
  • Relying on traditional financial, legal and environmental data when conducting due diligence is insufficient. Although vital components of due diligence, these traditional data sources alone do not adequately predict long-term success in an investment . Consider a more multi-disciplinary approach involving business strategy, corporate culture, information-technology operations and human capital.
  • One-third of due diligence investigations uncover serious problems in a potential business investment; problems that essentially become "deal breakers" that end further consideration.

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