Performing due diligence is a process that requires careful analysis and verification of facts. It can uncover hidden liabilities and risks, making it vital to any business transaction.
The term was legally formulated 4 years after the 1929 stock market crash as part of the 1933 Securities Act to hold securities dealers and brokers liable for not fully disclosing relevant data on security instruments they sell.
Mergers & Acquisitions
Mergers and acquisitions (M&A) are a powerful tool for companies to expand their market presence and achieve economies of scale. But before any deals can be executed, a thorough due diligence process must be implemented.
This includes a thorough review of the company's corporate structure and governance, its current and past financial performance, and any legal or regulatory issues that may be involved. It also examines whether a deal would violate antitrust laws.
This type of M&A Advisory is often conducted via hard documents, such as the company's consolidated balance sheet and income statement, and it focuses on numbers and data analysis. It also examines key indicators, such as the ratio of a company's earnings to its net worth and its debt/equity ratio. It can help identify red flags, such as rosy valuations and accounting inconsistencies. It also checks for employee retention and any labor disputes. Lastly, it reviews the company's track record on issues like ethics, supply chain transparency and sustainability.
Contracts & Agreements
You've probably heard the term "due diligence" before, especially if you've ever signed a contract or agreement. For example, homebuyers often go through a due diligence period when they sign the purchase contract for a property. This ensures that they're getting all the information necessary to make a good decision about their investment.
The details of a due diligence process will vary, depending on the type of transaction or relationship. For example, a coffee chain that's considering partnering with a new vendor will need to take different steps than a financial institution looking to partner with a third-party provider.
Regardless of the type of due diligence, it's critical to keep all parties informed throughout the process. This will minimize risk and help the process go as smoothly as possible. The end result should be a report that reflects everything you've covered during the process, typically delivered to the C-Suite or board of directors so they can determine whether to follow through with a given business arrangement.
Security Offerings
Due diligence is an important part of the process when a company wants to sell securities. This is because it ensures that investors are fully aware of any material information about the company before making a purchase. Failure to disclose this information could make the seller liable for criminal prosecution.
A disclosure document called a prospectus or offering circular is often the primary way in which information about the company is presented to prospective investors. This document must contain specific disclosures and comply with state and federal regulations regarding securities offerings.
For example, a bank performing enhanced due diligence on a new banking customer might consider the potential for money laundering or terrorist financing, and review social media and news articles about the client. This type of due diligence can help prevent compliance violations and costly business disruptions.
Due Diligence Software
Due diligence software can help reduce the risk associated with M&A activities by automating, improving, and streamlining the process. It can also provide guardrails to ensure that the necessary information is collected, analyzed, and reviewed during a transaction.
The best M&A due diligence software allows for easy integration, streamlined workflows, secure data storage, improved document management, and enhanced collaboration. It also helps organizations better understand the risks that could arise during a deal, and it can identify red flags that may have gone unnoticed.
Box is a popular M&A due diligence software with robust collaboration and file sharing tools. The platform also offers AI-based organization and analysis, cloud-based deployment, and bank-grade security. Its pricing is high, however, and it requires extra storage space for larger files. SS&C Intralinks is another popular choice. Its features include transformation tools, a virtual data room, mobile app collaboration, and AI-based organizational and analytical capabilities. The platform is available for both business and enterprise customers.
