The ABCs of Due Diligence

A common business and investing practice, due diligence is a necessary and effective in preventing detrimental investments or business partnerships. Most important in mergers and acquisitions of companies, due diligence is the process of evaluating the history (productive, financial, ethical, etc.) of a company to be certain of its nature. This may include extensive research and analysis that would require a sufficient amount of time and care. Level of customer approval, productivity, public relations, environmental issues, suppliers and employee satisfaction may all be important factors involved in due diligence.

Doing such research will ensure that a company becomes involved with a business that is not only successful currently but will continue to be in the future. Knowing the background of a company from due diligence will prevent partnerships with companies involved in illegal activities or those with large debt. Due diligence can also prevent the consequences associated with a conflict of interest.

Due diligence should be used when taking on a client, investing in a company, or partnering with another business. One should research each client, company or business thoroughly before becoming involved. Such research would include knowledge of financial records, access to all legal documents involved with company and all public statements made by the company. It should be remembered that not only the central companies should be researched, but branches of the company and the companies with which it is associated should be researched as well. It would also be helpful to know with whom the company is related professionally in order to assess whether or not the company is attached to a business that may be detrimental in some way.

The research necessary for due diligence can be done by requesting essential documents from the company itself or by accessing online databases to investigate the company and its records. Such databases provide information about the history of the company, the number of employees, its legal actions, and other relevant information.

The process of due diligence may seem tedious and time consuming, but failure to do such research can result in negative consequences. Failure to perform due diligence can cause investment in a company that shortly goes out of business, thus ensuing a loss of money. Besides loss of money for an investor, failure to perform due diligence can also result in a conflict of interests that can be highly detrimental to a company or individual. Also, a partnership formed without due diligence may leave one company paying off the other's debts or a company being given a bad reputation because of its association with another company.

Usually a contract can be created between companies establishing due diligence and providing the information needed for due diligence. However, if this opportunity is not made available, it is the responsibility of the person or company involved to perform due diligence. Failure to perform due diligence may be considered negligence. If due diligence is not preformed and a problem arises, a company may be responsible if the problem could have been avoided through due diligence.

NOTE: This article is not intended to convey legal advice. If you have questions regarding conflict of interest, please consult the licensed attorney of your choice.