Due Diligence Definition
Due diligence, in simpler words, is the process of collecting and analysing data to make the right decisions and stay compliant in the long run.
Due diligence is one of the most common processes conducted in a number of areas. Finance people are the ones who are mostly involved in this practice.
There are a lot of things of due diligence you may be still unaware of. Let’s dive in and understand everything about it.
Here, we will discover:
What is Due Diligence in Business?
Due diligence (abbreviated as DD), refers to the examination of a company’s financial, legal, economic and tax-related complications before engaging in an important financial transaction or entering into a contract to do business.
It goes beyond simply learning to collect new facts and figures about an enterprise so you can make an intelligent business decision. It is a common activity performed by different commercial organizations when they are interested in fundraising, taking on a merger and acquisition or any other financial ‘big’ things.
Why Due Diligence is Important?
Investors have been running due diligence very aggressively of late. Amid the wild swings that the startup ecosystem has seen of a BharatPe being accused of multiple wrongdoings, a GoMechanic crash landing, and a Zilingo just vanishing, investors are greatly exercising their DD muscle.
It’s important to note here that DD is not a legal mandate. It’s a set of standard protocols which companies are advised to follow before they decide to get into a business partnership.
Types of Due Diligence
These are conducted in multiple sectors and for numerous objectives, including the following:
- Mergers and Acquisitions (M&A)
- Income-producing property or land
- Investment and financing
- Intellectual property, which is legal rights that are granted by the government to individuals (or businesses) for their creations, or in the case of publications, of the right to own them; and which includes patents, copyrights, trademarks, and trade secrets.
- Logistics management
- Regulatory compliance and risk management
- Cybersecurity refers to the protection of computer systems, networks and data from theft or damage to their hardware, software or information, as well as fraud, and the service or electronic channel assumes or guarantees greater assurance.
- Personnel management
- ESG issues
- Entrepreneurial ventures and microenterprise
- Public procurement agreements
- Opportunities for establishing a franchise
- Collaborative agreements and alliances
What Does the Due Diligence Process Look Like?
Here how what normal due diligence looks like:
The Primary Focus:
The main concerns are on a startup’s basic business plan, the industry it works in and its competitors. They will also ask about market trends, and they’ll look to weigh the proficiency of the team and skill sets and the vision of the founder.
The Inevitability of Risk:
Risk has to be the first concern– it always is for any startup, especially in the beginning. They will look to understand the level of risk of the business and, thereby, establish a business assessment, the remedial action to be taken to lower that level of risk and the action already taken.
Product/Service Differentiation:
The unique selling proposition (USP) of the product developed by a startup is what sets it apart from its competitors and provides it with a competitive edge. Therefore, venture capital due diligence includes assessing startup development by examining its goods and services, meeting its intended customers, and analysing its go-to-market approach.
Intellectual Property:
The measure assesses a new company’s potential legal rights to intellectual property such as trademarks, copyrights and patents.
Investors might also investigate legal compliance, financials, IPO prospects and how much the actual value comes close to the headline value when all assets and liabilities are accounted for.
Common Errors During Due Diligence
Focusing too much on any one metric can pose a problem. Investors might overemphasise finances while dismissing critical factors like cultural fit, period of time the creator has spent developing a concept to a venture with sales and variable and unknown market elements.
How Can Technology Assist in Due Diligence?
Here is how technology can support the process of due diligence:
Automated Data Collecting:
Through the extraction of information from myriad sources such as regulatory filings, financial reports and social media, automation provided by technology can be employed to collect the data. The automated process is far swifter and more efficient than traditional data collection.
Data Analytics:
Investors can use data analytics to disclose trends, patterns and anomalies buried in extensive databases, leading to enlightened and well-informed decision-making.
Artificial Intelligence:
Artificial intelligence (AI) may soon be used to automate the review of legal documents, such as contracts and patents, and in turn help to identify potential pitfalls and opportunities.
What is Mentioned in a Due Diligence Report?
The due diligence report includes a deep analysis of a company’s financial, legal, and operational health, as well as any potential risks and opportunities associated with an investment or purchase.