When you see the word Due Diligence (DD), what’s on your mind? Maybe you’re on the same page with me, that you have no idea what the Frappuccino is Due Diligence? If so, let’s understand the term together!
What is due diligence?
Firstly, let’s break down what the words mean on their own. Due can be explained as correct or rightful while diligence can be defined as paying close attention or caution. So, with the 2 words merged into one, due diligence can be defined as a thorough investigation of a specific target. It can be also a process of verification where the buyer or the researcher has the chance to verify the information that has been presented is accurate and true. That’s right, for an example, let’s say if your daughter is dating or marrying someone, before accepting him as your son-in-law, you’ll do due diligence on that man, checking everything about him such as family, education, finances, culture and even principles.
Similarly, in the business world, due diligence is conducted in hopes of identifying the potential threats and unexpected problems while ironing out surprises before entering an agreement or signing a contract with the opposing party. Due diligence is mainly conducted in three fields which are: (1) operational due diligence, (2) financial due diligence, and (3) legal due diligence.
Who performs due diligence?
With that aside, due diligence is mostly performed before making a huge or important decision. For example, for banks, this decision can be when approving a bank loan to an individual. Banks will need to do due diligence such as checking the financial history of the individual who is applying for the loan. Due diligence can also be practised before deciding to ‘Merge and Acquire‘ (M&A) with a potential company. This both works for businesses of all sizes and banks as they will need to do due diligence towards the potential business to see if the M&A is profitable or not. Due diligence can be also used by businesses before deciding to fund a business or a project. An individual, on the other hand, might want to practice due diligence before buying a second-hand property. This can be done by hiring experts to check on the condition of the property or to determine if the property complies with legal terms.
Why is due diligence important?
Why is doing due diligence crucial for a company? Well, other than the most obvious reason, which is to have peace of mind, businesses practice due diligence for risk mitigation. Before making any huge and life-changing experience, any business would want to reduce the risk of failing or trusting the wrong party. Trusting the wrong party not only causes a business to lose money but might also bring negative effects to the brand image of the business. Due diligence also helps entrepreneurs make informed decisions. With the information obtained by conducting due diligence, every step taken by the entrepreneurs will be based on rational, calculated, and weighted decisions instead of rash ones that may cause the downfall of a company.
Is it as they say it is?
A business will also conduct due diligence to make sure they are getting what they have been promised. Sometimes during an agreement, some information or benefits laid out by the opposing party might be too good to be true. Thus, every business must execute due diligence to make sure the legitimacy of the information provided. The information and facts gained after conducting due diligence or also known as the due diligence report can also be used by a business to compare with businesses of similar industries or direct competitors. With detailed comparisons and a variety of options, business owners will be able to weigh each option and choose the option that best suits them.
Outsourcing due diligence to professionals
While due diligence is a crucial process, it is sometimes a time-consuming and costly one. As every field of business will need due diligence, different professionals such as brokers, attorneys and accountants will sometimes require different pieces of information from the same source to do their own evaluation of due diligence. So, businesses will need to be smart about conducting due diligence in an effective and efficient manner as a slow due diligence process might cause a business to miss out on a once in a lifetime or limited-time chance provided by the opposing party.
With the understanding of due diligence, do remember to practice it whenever you will be making a huge decision such as choosing the place for your business’s premise or choosing the best business partner. As an entrepreneur, it is important to take risks, but it is too crucial to make an informed decision if the information is available. Do you know another informed decision that you can make? Purchasing yourself a ready-made business from our selection of shelf companies! As our shelf companies are already checked thoroughly by us, we will be happy to provide you with the due diligence summary and assist you if you need more information! Interested to learn more? Why not contact our experts to clear your doubts?