How Due Diligence Works
Due diligence makes sure that all parties are informed of the possibility of a transaction. This way, they can assess the risks and benefits of moving forward with a deal. Due diligence can prevent surprises that may derail the deal or create legal disputes after it has closed.
Companies generally conduct due diligence prior to purchasing an entity or merging it with another. The process is typically divided into two parts that are financial due diligence as well as a legal due diligence.
Financial due diligence involves analyzing a company’s assets and liabilities. It also examines the company’s financial records and accounting practices, as well as its compliance with the law. During due diligence, many companies will ask for audits or copies of financial statements. Due diligence also includes supplier concentration as well as the human rights impact assessment.
Legal due diligence concentrates on a company’s policies and procedures. This includes a review of the company’s legal status, compliance with laws and regulations, and any legal liabilities or disputes.
Based on the type of purchase, due diligence can last up to 90 days or more. During this time, both sides typically agree on an exclusivity period. This prevents the seller from contacting others buyers or from continuing negotiations. This could be beneficial to sellers however it could backfire if the due diligence process is not conducted properly.
It is important to remember that due diligence is not an event, but a process. It is a process that takes time and should not be rushed. It is vital to maintain open communications and, if feasible, to meet or exceed deadlines. If a deadline is not met, it is important to pinpoint the reason and determine what steps can be taken to resolve the problem.