A merger or sale can be a major event for a business. It can also trigger serious issues. These include legal liabilities, financial losses and reputational damage. Due diligence is a process that enables companies to fully assess any new venture.
Due diligence is a procedure that identifies risk factors. These risk factors are dependent on the nature and type of the business. For instance banks or financial institution might require a more rigorous level of due diligence than a retail store or e-commerce company. Similarly, a company with an international footprint might need to examine the laws specific to its country that impact its operations more than a local, domestic customer.
Companies should be aware of the possibility that customers be listed on sanction lists. This is a critical investigation that should be carried out before entering any contract into, particularly in cases where the customer has been found guilty of engaging in illegal activities such as bribery or fraud.
Other factors to be considered in a due diligence procedure include the dependence on specific individuals or entities. For instance, a dependence on the owner-manager, or other key employees of a business might be an indication of a problem that could result in a sudden loss if they suddenly quit the company. Another factor to consider is the amount of shares owned by top management. A high percentage of ownership is an indication of good things, whereas the low percentage is a sign of danger.