Whether you’re evaluating a property purchase, an acquiring company looking at a potential target before an acquisition or merger, or even when you apply for a job due diligence is a thorough and careful process. The more comprehensive and thorough your assessment, the less likely you’re to encounter unintentional risks or unexpected surprises which could affect a transaction.
Due diligence is conducted in two major types of business transactions — the sale or purchase of goods and services, and mergers and acquisitions. The steps you need to follow for each of these can differ dramatically, depending on your specific situation and the nature of the transaction.
In a purchase or sale transaction, you’ll have to review the terms of the contract and review the financial statements of the company. This involves analyzing liabilities, assets and cash flow. The intellectual property of the company, which includes trademarks, patents, and copyrights, and determine any agreements between third parties that pertain to these assets. You’ll also look at the company’s security and compliance with the law and regulations, including environmental.
Due diligence is more thorough during an acquisition or merger than it is in the case of a purchase or sale. You’ll look at the strategic goals and figure out whether the two companies are a good match. You’ll also examine the potential for growth of the company, market expansion possibilities, and the ability to scale up in response to growing demand. It will also analyze the corporate governance of the company, adherence to ethical standards, as well as social responsibility initiatives. You’ll also look at any major risks that may impact the future growth of the company and its achievement, and formulate strategies for mitigating these risks.