We tend to think of due diligence as a boring bit of compliance when buying or selling a business. Often auditors come and hunch over files for a few days or weeks and then give you a report on their findings.
But in today’s fast-moving world due diligence can be a considerable asset to your business. Think of how quickly a social media comment can damage a business – having a process to prevent this, or, if it happens, a process to respond quickly, can prevent or at least limit harmful effects on your business.
What is due diligence?
It is really the process of taking due care that any major decision will add value to your business. Aligned to this is being prepared to react to any event such as the social media example above.
What you would do when undertaking due diligence varies with the task needed. For example if you are appointing a new director there would be:
- Advertising for the position,
- A short list,
- Final interviews, and
- Detailed checks including detailed referee questioning, criminal and credit checks, and social media screening (for any evidence of behaviour prejudicial to the organisation) and so on.
With buying a business there would be:
- Detailed compliance tests – such as all laws obeyed, taxes paid, no major legal issues, all patents renewed and all contracts in order,
- Detailed checks on current management,
- Checks on controls and finances,
- Human Resource policies are comprehensive and working well,
- New product strategy, and
- All business processes in order.
We live in a busy fast-moving world so set up checklists for the types of due diligence you use.
Remember that in the final analysis these checklists are only a guide. Management makes the final determination after reviewing checklists.
By doing a thorough job of due diligence, management gains important knowledge – this can be used to leverage things such as an improved deal.
The bottom line – due diligence is much more than just compliance, it’s a valuable management tool.
This article is a general information sheet and should not be used or relied upon as professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your financial adviser for specific and detailed advice. Errors and omissions excepted (E&OE)