What is Due Diligence?
Due diligence is a systematic process that focuses on investigating a potential investment made by an interested party into a merger or acquisition target to make a decision on whether or not to proceed with the investment. The process entails a thorough investigation into the management team, products, history, financial statements, and business model of the venture.
Due diligence gives an idea of an investment’s potential risks and rewards and helps investors make a more informed decision. Of course, due diligence is not a guarantee against all risks, but it can help identify and mitigate potential problems. Therefore, it is integral to any decision-making process related to M&A investment to ensure it is the right one.
The due diligence period also allows acquirers to learn more about a target company’s products, prospects, and value and how it will fit into their existing businesses or portfolios. Failure to conduct adequate due diligence may result in overvaluation, missed synergy opportunities, and integration difficulties.
Due Diligence basics for startup investment:
Startups are high-risk investments, so performing due diligence before investing is essential to ensure that the team is proficient, the product is solving a problem, and there is a need for the product in the market. Financials are also essential to assess the company’s financial health and ensure that the startup is not overvalued and that there is a clear path to profitability.
Due Diligence Pros and Cons:
- Ensure safe M&A investment
- Knowing the true valuation of the targeted company
- Minimize risk
- High cost
Types of Due Diligence:
- Hard due diligence is all about the numbers.
- focuses on verifiable data and numbers.
- Most of the due diligence falls into this category.
- Financial/accounting, tax, and operational due diligence are examples of hard due diligence.
- Soft due diligence process focuses on people: employees, customers, and partners.
- Focus on the human element, the culture of the organization, and the roles, capabilities, and attitudes of its people.
- harder to conduct.
- Culture and human resources due diligence are examples of soft due diligence.
In conclusion, proper due diligence can save investors from a bad investment. It can also prevent a company from making the wrong move in its business.