How Due Diligence Works

Due diligence is the process of ensuring that all parties involved in a deal are fully informed. They can then assess the potential benefits and risks of a deal. Conducting due diligence can avoid unexpected surprises that may derail the deal or lead to legal issues after the deal closes.

In general companies conduct due diligence before purchasing a company or merging with a different company. The process is typically divided into two parts which are financial due diligence as well as a legal due diligence.

Financial due diligence is the method of analyzing the assets and liabilities of a business. It also evaluates the accounting practices of a business, financial history and compliance with the law. During due diligence, many companies ask for copies or audits of financial statements. Other areas that require due diligence include supplier concentration and human rights impact assessment (HRIA).

Legal due diligence focuses on the company’s policies and procedures. This includes a look at the status of the company in terms of its legality in compliance with laws and regulations, as well as any legal disputes.

Due diligence can take up to 90 days or more depending on the type and size of the acquisition. During this period the parties typically agree on an exclusivity. This stops the seller from pursue other buyers or to continue negotiations. This can be beneficial to sellers however it could backfire in the event that due diligence is not properly executed.

It is essential to remember that due diligence isn’t an event, but rather a process. It requires time to complete and should never be rushed. It is important to maintain open communications and, if feasible, to meet or beat deadlines. It is crucial to know the reason for a missed deadline and what steps can be taken to address the issue.