Due diligence, also referred to as “DD,” may seem easy to understand on the surface, but it’s actually a pretty complex topic that shouldn’t be overlooked.
To be diligent is to be attentive, hardworking and thorough. The definition of being diligent is comparable to practicing due diligence. Due diligence, by definition, is the necessary care exercised by an individual to avoid causing harm to other persons or property.
A BRIEF HISTORY OF DUE DILIGENCE
The term due diligence originated in the US, where the process is referred to as “reasonable investigation” in the Securities Act of 1933. The act endorses a law against dealers accused of disclosing inadequate information regarding purchase of property or securities to investors.
THE IMPORTANCE OF DD
Due diligence can be split into four main categories: general due diligence, due diligence in business, due diligence in investment and due diligence in negotiation.
Traditionally, due diligence has involved a process of discovery that is relevant in key business transactions, as well as operational activities. As seen in detail below, due diligence has become the norm in decision-making regarding:
Due diligence can be applied in different situations, such as:
By undertaking a detailed review of new and existing third parties, you can help safeguard your reputation and comply with your regulatory requirements. Otherwise speaking, due diligence is an investigation or audit of a potential investment or product to confirm all facts, which ensures finding the material risks and the right perspectives.
The theory behind due diligence holds that performing this type of investigation contributes significantly to third-party risk assessment, onboarding decision-making, and identifying beneficial ownership structures by enhancing the amount and quality of information available. Furthermore, by ensuring that this information is systematically used to deliberate on the decision at hand and all its costs, benefits, and risks.
Every deal is unique and the needed depth of due diligence on a specific topic will vary depending on the company and the dynamics of the deal.
HOW DOES IT WORK?
Whether you are the buyer or the seller, it is important to know exactly what information will need to be investigated before the deal can be finalized.
THE Right-Sized DD TEAM
In order to obtain and organize the proper information, you must choose the right sized DD team. Comprehensive DD should not only involve people from the legal department but also other departments such as financial, logistics and IT. It should include people of different ages and functional backgrounds.
THE REALITY OF THE FOUR WALLS
Taking into consideration that during due diligence the DD team becomes acquainted with the confidential information about the third party, it is very important to “keep it all strictly between the four walls”.
A COMPREHENSIVE CHECKLIST
For a more productive DD, you will also need a DD checklist. The main reason for a due diligence checklist is to make sure you do not overlook anything when executing your deal. Having a due diligence checklist allows you to see what obligations, liabilities, problematic contracts, intellectual property issues, and litigation risks you may encounter.
WHAT YOU GET WITH DUE DILIGENCE
After the active phase of conducting due diligence-researching facts, gathering raw data and making in-person observations and interviews, you will need a DD report. The DD report generator organizes data that will allow you to assess the existing situation, identify risks and uncover issues that provide leveraging opportunities. In other words, the due diligence report is your “behind-the-scenes reference material” during contract or price negotiations, or a source of information for the type of deal you want to execute.
HOW CAN WE HELP?
Our team of lawyers and financial experts have extensive experience in helping our clients make mindful decisions by doing general, enhanced and on-going due diligence in different areas.