Due Diligence is an exercise of care, carried out before entering into an agreement, business venture, mergers, and acquisitions, etc. Due- Diligence is also interchangeably used for investigation, audit, or performance review. It is a very comprehensive process requiring experienced professionals who make a detailed study of the organization’s objectives, culture, management, processes, people, resources, cost-benefit analysis, etc. This activity is usually done by a third party so that opinions are unbiased and can be trusted by all parties involved in the agreement.
Trust is the crucial factor while conducting business, that being said it is not enough. Companies have branches that spread across geographical boundaries and transact with various parties unaware of the risk involved in transacting with them. Third-party due-diligence is an independent investigation using internal and external resources conducted to gather important and reputable information about the buyers, suppliers, contractors, etc with whom the organization usually transacts.
I. Due Diligence in different areas of Business Operations:
1. Finance and Accounting:
Due-diligence in this area includes reviewing the firm’s accounting policies and controls, analyzing cash flows, reviewing balance sheet and off-balance sheet assets and liabilities, identifying cost drivers, assessment of projections and forecasts.
2. Information Technology (IT) infrastructure and Security:
Information technology due-diligence assesses a firm IT structure, processes, controls, IT assets, existing and new IT projects, reviewing data security, cost allocated towards systems, and security.
3. Human Resources:
Review of HR procedures and employee management, recruitment process, appraisal and promotion policies, etc to ensure it aligns with the business goals and visions.
4. Risk and Compliance:
Companies are governed by laws, rules, and regulations that have to be followed to avoid penalties and smooth running of the organization, due-diligence in risk and compliance includes the review of the company’s compliance procedures and meeting the same within deadlines.
II. Need for Due-Diligence:
Due-diligence of various parties that deal with an organization is needed in order to:
- Have a clear picture of the business potential as well as the risk involved in dealing with these parties
- Eliminate the possibility of a corruption threat.
- Find out the reputation and the credibility of these parties in order to have smooth business operations.
Increasing regulations, laws, legislation, and corporate governance require companies to establish relationships with their vendors, buyers, etc with utmost care; hence, due-diligence provides sufficient information before finalizing the business agreements and maintaining a long-term relationship with the best in the industry.
III. Steps to effective third party Due-Diligence
It is very crucial to have an effective strategy in place to evaluate business-related risks while conducting the due-diligence exercise. It is very important to have a proper insight of the business operations and with whom the organization has regular dealings in order to avoid any financial and reputational risk, hence, the following steps should be considered for an effective due-diligence:
1. Gathering Information:
It is important to collect all information related to the organization including its incorporation documents, details of owners/shareholders and board members, organization’s structure, etc.
2. Understanding the Organization’s Objectives:
The team needs to understand the organization’s financial and strategic objectives. They should ensure that the contracts and agreements entered by the organization are aligned with the organization’s goals and objectives for the benefit of all.
3. Understanding Compliance Concerns:
Businesses these days deal with a variety of stakeholders both internally and externally, also these stakeholders are not confined within the boundaries of the same city, state, or country. While dealing with various parties regardless of their location it is important to know all the regulations that the business may be subjected to so that compliance risks can be mitigated. The due-diligence team should also ensure that the organization complies with all the rules and regulations of the state and the central government and check its past records in order to provide an accurate opinion about the firm on their compliance front.
4. Screening parties against various watch lists:
This is a basic level check to ensure that the buyers, suppliers, vendors, contractors, etc do not feature on any sanction lists or list of debarred.
5. Conducting Risk Assessments:
Once the team has collected all the preliminary information the next step involves risk assessment, the following points are considered in this step:
- Industry sector related risks
- Political and country risks
- Entity risk- in terms of owners, shareholders liabilities, various projects, and ventures undertaken or in the pipeline
- Financial risk, etc.
6. Verification of the information collected:
A lot of information is collected during the due-diligence process. It is important to validate the information received and categorize the various stakeholders into low-risk or high-risk profiles. In the case of the high-risk profiles these are further subject to more assessment to make an opinion of the present and future business dealings.
7. Establishing a continuous monitoring system:
The checks and reviews are done during the due-diligence process help the organization in establishing a continuous control system. If the organization continues to carry on these checks regularly they can monitor their relationships with parties and save the organization from any future vendor-related risks.
8. Reviewing the process regularly:
Every business changes continuously, it grows and diversifies. Hence, the organization should regularly visit their objectives and ensure that their dealings, operations, and transactions are aligned to business goals. Therefore, due-diligence should be carried out periodically and regularly.
Due-diligence is a pre-intelligence process concerning the investee’s credentials. Thus, an independent due-diligence report is the most important factor that helps an investor to make his investment decisions. Diligen’s due-diligence team is the one-stop solution for the due-diligence services both from the buy and sell-side. Our team carries out the process by subjecting transactions through a comprehensive due-diligence process that helps clients to determine the effectiveness of their systems, processes, reporting, and controls which in turn enable organizations to derive maximum value from their products and services.
Diligen’s dedicated team is trained to understand, analyze, and communicate the various risks, issues, value drivers, and opportunities available to our clients. Our team carries out the review and verification of information by conducting meetings with key persons in the organizations. And they document the entire process providing organizations with a framework that helps them identify potential risks during their operations. At Diligen we value our relationships with our clients and provide them tailor-made due-diligence services that cover minors issues and also major deals, delivering maximum value and best quality of service on time.