Many business owners go through the due diligence process to ensure a business decision is sound before signing contracts or moving forward with plans. That is why it is important to understand the different types of corporate due diligence before you begin your evaluation.
One of the most important areas to conduct due diligence for any business decision is financials. The financial side of things can play a huge role in whether or not a project moves forward after evaluation. This holds true for an acquisition, merger, software program or anything else relating to your company.
There are many aspects involved in a company’s financials. This is why it is so significant to carefully consider the monetary values before making any decision. Corporate due diligence often looks at the following areas during an investigation:
- Creditors and debtors
- Company projections
- Profit margins
- Sales pipeline
- Financial audits
- Plan for capital expenditure
- Variable and fixed costs analysis
Of course, there are other areas to also examine that are specific to your business and industry. Evaluating these parts can help you decide whether a business move is financially sound for your company or to find a way to make that happen.
Of course, taxes are considered when making a business decision. If you acquire a new part of your business, how would that affect your taxes? The last thing you want is to procure a new tax liability that can negatively affect your company.
For example, an acquisition’s taxes from the past three years may offer a sense of how the business is doing. There are also certain documents you should review for verification purposes in order to identify potential tax issues and determine tax compliance. These include audits, tax returns, credit, debt and net operating loss.
While taxes can stressful and complicated, it’s crucial to consider this for due diligence. Your company should not be negatively affected by an acquisition’s taxes and this process helps you determine the risk factor.
Taking a look at the legal side of the business is vital. This part of the process involves many moving pieces that need to be examined carefully. The following is a list of certain legal matters that should be considered during this investigation:
- Loans and bank financing
- Lines of credit
- Joint venture agreements
- Limited liability agreements
- Licensing agreements
- Company guarantees
- General meeting minutes
- Board meeting minutes
Mergers and Acquisitions
For any company, a merger or acquisition is a monumental decision that can either benefit or adversely affect your business. To avoid the negative impact, corporate due diligence is essential.
One good way to do this is to create a checklist for the process. This enables you to ask the right questions and ensure the merger will work in your company’s favor. That way, you can check and verify information, examine all the facts and make an informed decision about how such a move will affect your company.
Customers are the lifeblood of any company, which is why it’s crucial to consider them when conducting due diligence. This includes aspects like credit policies, customer satisfaction reports and service agreements. It also helps to understand who your top customers are and how often they are spending.
The due diligence process is an opportunity to see if customer needs are being met and identify areas for improvement. Understanding the aspects of your customer base can help you decide whether a business move would be beneficial to customers or not.
One final area for to consider is human resources. This requires careful analysis of your employees, including salaries and retirement options. You should also evaluate employment contracts to see if there are inconsistencies or issues. Common human resources policies should be reviewed. Finding the issues and determining how to solve these problems or increase efficiency is what this stage is all about.
Other Areas for Due Diligence
While the areas above are some of the main ones to focus on during corporate due diligence, it is important to note that they are not the only areas. In order to complete a full and thorough check on an upcoming business decision, it’s important to remember that there are other factors to evaluate. These include research and development, environmental factors, intellectual property, sales and marketing.
All of these considerations come to one point, and that is how well the new business venture fits into your company. After all, if it doesn’t make your company more successful or it isn’t easy to integrate into your system, then it probably isn’t worth the risk.
Conducting Your Due Diligence
The due diligence process is not one to be taken lightly, as it helps you make sound business decisions. Just remember that there are many different areas your company should consider when conducting a due diligence investigation. Beau Dietl and Associates is here to help you examine your business and offer guidance during this process. Contact us to learn more.