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Due diligence is an in-depth analysis of the inventory of the business as well as financials and contracts as well as intellectual property. It also involves an examination of any legal matters that could impact the acquisition.
Due Diligence is an essential part of any M&A transaction, and it aids investors to determine the true value of a business. Often due diligence involves the review of documents that are confidential and requires the signing of non-disclosure or noncompete agreements. It is essential that these procedures are done in a timely manner to avoid potential issues that may negatively impact the deal, or result in it falling through.
Investors should also consider any concerns about intellectual property, including patents and disputes, as well as licensing. Additionally, they should examine the human component of the company and understand its culture, which includes golden parachutes, severance plans and stock purchase options.
The $9 billion loss of Theranos is a stark reminder that you should always conduct thorough due diligence prior to investing. While many of the red flags were openly obvious, it shouldn’t serve as an excuse not to go through this step. Due diligence can be a long, time-consuming task that requires coordination of many stakeholders and the expertise of experts in various fields. It’s important to identify the objectives of your due diligence, which will help you determine the resources needed and the information you can gain from it. In some instances it is possible to engage outside experts like insurance agents, lawyers and financial or technology experts.