Due Dilligence

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What is Due Diligence?
Due diligence is a process of verification, investigation, or audit of a potential deal or investment opportunity to confirm all relevant facts and financial information and to verify anything else that was brought up during an M&A deal or investment process. Due diligence is completed before a deal closes to provide the buyer with an assurance of what they’re getting.
Importance of Due Diligence
Transactions that undergo a due diligence process offer higher chances of success. Due diligence contributes to making informed decisions by enhancing the quality of information available to decision-makers.
From a buyer’s perspective
Due diligence allows the buyer to feel more comfortable that their expectations regarding the transaction are correct. In mergers and acquisitions (M&A), purchasing a business without doing due diligence substantially increases the risk to the purchaser.
From a seller’s perspective
Reasons For Due Diligence
There are several reasons why due diligence is conducted:

  • To confirm and verify information that was brought up during the deal or investment process

  • To identify potential defects in the deal or investment opportunity and thus avoid a bad business transaction

  • To obtain information that would be useful in valuing the deal

  • To make sure that the deal or investment opportunity complies with the investment or deal criteria


Due Diligence Activities in an M&A Transaction

There is an exhaustive list of possible due diligence questions to be addressed. Additional questions may be required for industry-specific M&A deals, while fewer questions may be required for smaller transactions. Below are typical due diligence questions addressed in an M&A transaction:
1. Target Company Overview
Understanding why the owners of the company are selling the business
2. Financials
3. Technology/Patents
4. Strategic Fit
5. Target Base
6. Management/Workforce
7. Legal Issues
8. Information Technology
9. Corporate Matters
10. Environmental Issues
11. Production Capabilities
12. Marketing Strategies

Why Due Diligence Matters

Due diligence helps investors and companies understand the nature of a deal, the risks involved, and whether the deal fits with their portfolio. Essentially, undergoing due diligence is like doing “homework” on a potential deal and is essential to informed investment decisions.