Due diligence is a process of vetting an entity prior to concluding business agreements either with vendors, a third party or client. It is also an essential element of good governance. It requires individuals and groups to perform the same actions as any reasonable person under similar circumstances.
It was once the norm that when a company’s board directors was conducting due diligence, it was an entire team of auditors physically coming to the office and looking through file after file of financial records and documents. While there are still some situations where this is required, the vast majority of companies do their due diligence via a virtual data room (VDR).
The following are the primary types of information needed in due diligence:
This includes all financial records, including tax records as well as financial evaluations and audits by external service providers. This will include profit and loss, cash flow forecasts, balance sheets, and more.
Information about the products and service the company offers, such as any R&D projects that are ongoing. This may include a list of any patents, trademarks and other intellectual property.
Buyers are also interested in a company’s competitive advantage, which could mean details such as their customer base, sales pipeline market reach, and so on. This can be achieved by analysing the data an organization has regarding these aspects, as well as by interviewing current customers.
As a seller, you must be willing and able to provide the information requested by an interested buyer. It’s not enough to divulge everything, since it’s essential to protect your intellectual assets. Therefore, it’s often advisable to stage access control to ensure that only the most trusted partners have access your most sensitive data.
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