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Due diligence is the process of ensuring that all parties are aware of any potential transaction. They can then assess the risks and benefits of a possible deal. Conducting due diligence can prevent surprises that could sabotage the deal or cause legal disputes after it has closed.
Companies generally conduct due diligence prior purchasing an entity or merging it with another. The process typically includes two main parts that are financial due diligence and legal due diligence.
Financial due diligence is the method of analyzing the assets and liabilities of a company. It also examines a company’s accounting practices, financial history and compliance with the law. When conducting due diligence, companies will often request documents of financial statements and audits. Other areas that require due diligence include supplier concentration and human rights impact assessment (HRIA).
Legal due diligence is a review of a company’s policies and procedures. This involves a review of the company’s legal standing, compliance with laws and regulations, as well as any legal liabilities or disputes.
Due diligence can last 90 days or more, depending on the type and size of the acquisition. During this time, both sides typically agree to an exclusivity period. This prevents the seller to engage in other buyer discussions. This can be advantageous for the seller, but it can also be detrimental if the due diligence process was not conducted properly.
It is important to keep in mind that due diligence is not an event, but rather a process. It is a process that takes time and should not be undertaken in a hurry. It is important to keep communication open and, if feasible to meet or exceed deadlines. If a deadline is missed It is important to understand the reason for the delay and what steps can be taken to rectify the problem.