How Due Diligence Works

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Due diligence ensures that all parties are informed of any potential deal. So, they can determine the potential risks and benefits of pursuing the deal. Due diligence can help avoid unexpected surprises that could sabotage the transaction or lead to legal disputes after its close.

Companies usually conduct due diligence prior to purchasing the company or merging it with another. The process is usually divided into two major components including financial due diligence and legal due diligence.

Financial due diligence is the procedure of analyzing the assets and liabilities of a business. It also examines the company’s financial history and accounting practices, as well as its compliance with the law. In due diligence, companies typically request documents of financial statements and audits. Due diligence also includes supplier concentration as well as the human rights impact assessment.

Legal due diligence concentrates 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, and any legal disputes.

Depending on the type of acquisition, due diligence can last up to 90 days or more. During this time, both sides typically agree on an exclusivity period. This prevents the seller from contacting others buyers or from continuing negotiations. This is beneficial for the seller however, it could backfire when due diligence is conducted poorly.

It is important to keep in mind that due diligence is not an event, but a process. It requires time to complete and shouldn’t be attempted to complete in a hurry. It is important to maintain open communications and, if feasible, to meet or surpass deadlines. It is essential to know why a deadline was missed and what you can do to address the issue.

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