The due diligence process is an exhaustive examination of the equipment, inventory, financials, contracts and intellectual property. It also consists of an assessment of any outstanding legal issues that could impact the acquisition.
Due Diligence is a vital element of any M&A transaction, and it aids investors to determine the true value of a company. Due diligence typically involves reviewing confidential documents and signing non-disclosure agreements or non-compete contracts. It’s vital that these processes are completed thoroughly to avoid potential issues that may negatively impact the agreement, or even lead to it not being completed.
Investors should also check for any concerns with respect to intellectual property rights, such as patents or disputes, as well as licensing. Investors should also be aware of the company’s culture such as its severance program, golden parachutes, and stock purchase options.
The $9 billion Theranos collapse is a clear warning to conduct thorough due diligence before investing. Although some of the red flags were openly obvious, it shouldn’t serve as an excuse not to go through the process. Due diligence can be a time-consuming and tedious job that requires coordination between different parties and the knowledge of professionals in various fields. It is essential to identify the objectives of due diligence. This will help you determine what resources are required and how to use them. In certain instances, this could mean involving external experts such as attorneys, insurance agents or financial or technology consultants.