Just as no two fingerprints are alike, similarly, the dynamics and functioning of every company are unique. This is of particular importance at the time of a merger or acquisition between two entities. While seemingly exciting with the thought of a lucrative offer having been made, and new beginnings in close sight, it is important to not get ahead of oneself, before following the due process of due diligence.
Simply put, due diligence is a research and analysis driven process that is undertaken before an investment is made, a company is acquired, a partnership is struck, or a loan is disbursed. By doing so, both parties involved are able to get a holistic view of the deal they are about to enter into as well as uncover any red flags before it is too late.
For any corporate lawyer, this is one of the most important processes that they carry out, but outside of the legal space, do companies really understand the importance of conducting due diligence? We take a look at some of the reasons why companies fail to understand its importance:
Lengthy process tends to turn people away from doing it
Owing to the fact that lawyers and those carrying out the due diligence have to scour over several hundreds of documents, depending on the size of the company, the process is often long drawn and time consuming. In cases where most parties want to close the deal at the earliest, this process is often skipped.
Companies are of the view that merely looking at their books of accounts is enough
Possible lack of awareness of the importance of due diligence could be one of the reasons why companies assume that merely looking through books of accounts is enough. While this is just one part of the process, due diligence looks through every agreement, rental/sale deed, registered, to uncover any anomalies within the company. Furthermore, the process also takes into consideration the credibility of company directors, the integrity of the organisation, and how operations are managed.
Not enough resources to carry out a due diligence
Having qualified resources is of paramount importance to conduct due diligence. Not having adequate resources should not keep one from following protocol. To overcome this challenge, services such as those from investigation experts who are trained to spot red flags can be deployed for the due diligence.
Lack of awareness about the consequences of not conducting a due diligence
Up until now, the lack of awareness could have been a major contributor to companies not conducting due diligence. Failure to do so could have major legal ramifications on all entities involved, which is both costly, and frustrating to cope with.
Reasons why companies should deploy the services of a security solutions firm to conduct a due diligence:
Identify potential red flags early on
By carrying out a due diligence, you will be able to get a crystal ball glaze into the company, and understand if there are any red flags, or ulterior motives behind the sale/merger of the business.
Complete transparency and knowledge of the target’s finances and public image
Having a holistic view of the target’s financial position and brand image will allow you to evaluate the pros and cons of the merger with a clearer mind, thereby helping you make an informed decision. By understanding the company’s financial position, as well as brand image, it will allow you to evaluate the pros and cons of the merger with a clear mind.
Asset verification
While it can be easy for a company to claim stake over land and other material assets, it is only through due diligence that you will be able to verify the ownership and terms and conditions that govern these assets.
Ensure all licenses, certifications and statutory obligations are in order
When passing on the business to a new owner, it is prudent that it is handed over with everything in order. Due diligence will help you check that all statutory obligations are complied with, licenses are valid, and certificates are in order, and gives you time to remedy it, in case they are not.
The bottom line
Due diligence might seem like a lengthy, tedious, and costly process; but in the long run, undertaking this process, can save you time, resources, and money, and most importantly, from a bad business decision.
