what is due diligence - why is due diligence conducted

7/27/2019 What is Due Diligence - Why is Due Diligence Conducted

1/5

8/12/13 What is Due Diligence - Why is Due Diligence Conducted - Due Diligence Basics - Astute Diligence - Chicago, Illinois

www.astutediligence.com/Diligence_Basics.htm 1/5

August 12, 113

This primer on duediligence will quickly getyou up to speed on thebasics of due diligenceand how it preventsnumerous problems thatoften surface in businesstransactions.

Mission | Value | Method | Clients | People | Press | Resources | Careers

If you want to learn about due diligence, you've come to the right place. Thisintroduction to due diligence covers the basics concerning due diligence.

What is Due Diligence?

Why is Due Diligence Conducted?

Who Conducts Due Diligence?

When is Due Diligence Conducted?

How is Due Diligence Conducted?

How Much Due Diligence Needs to Be Conducted?

Can I Overdo My Due Diligence Effort?

How Much Time is Allocated for Due Diligence Completion?

How Should I Prioritize Tasks Within the Due Diligence Effort?

How Much Does Due Diligence Cost? Who Pays for It?

How Do You Maintain Confidentiality During a Due Diligence Engagement?

Does Due Diligence Ensure that a Business Transaction Will Be Successful?

Can I Be Sued for Failing to Conduct Adequate Due Diligence?

Can Using a Due Diligence Consultant Ensure that I Will Not Be Sued?

What is Due Diligence?

Due diligence is used to investigate and evaluate a business opportunity. The termdue diligence describes a general duty to exercise care in any transaction. As such, itspans investigation into all relevant aspects o f the pa st, present, and predictablefuture of the business of a target company. Due diligence sounds impressive but

- Due Diligence Checklists
http://www.astutediligence.com/Diligence_Contact.htmhttp://www.astutediligence.com/Diligence_Basics.htm#costhttp://www.astutediligence.com/Diligence_Basics.htm#priorityhttp://www.astutediligence.com/Diligence_Basics.htm#howmuchhttp://www.astutediligence.com/Diligence_Basics.htm#howhttp://www.astutediligence.com/Diligence_Basics.htm#whenhttp://www.astutediligence.com/Diligence_Basics.htm#whathttp://www.astutediligence.com/Diligence_Basics.htm#ensurehttp://www.astutediligence.com/Diligence_Basics.htm#suedhttp://www.astutediligence.com/Diligence_Basics.htm#successhttp://www.astutediligence.com/Diligence_Basics.htm#confidentialhttp://www.astutediligence.com/Diligence_Basics.htm#costhttp://www.astutediligence.com/Diligence_Basics.htm#priorityhttp://www.astutediligence.com/Diligence_Basics.htm#timehttp://www.astutediligence.com/Diligence_Basics.htm#overdohttp://www.astutediligence.com/Diligence_Basics.htm#howmuchhttp://www.astutediligence.com/Diligence_Basics.htm#howhttp://www.astutediligence.com/Diligence_Basics.htm#whenhttp://www.astutediligence.com/Diligence_Basics.htm#whohttp://www.astutediligence.com/Diligence_Basics.htm#whyhttp://www.astutediligence.com/Diligence_Basics.htm#whathttp://www.astutediligence.com/Diligence_Career.htmhttp://www.astutediligence.com/Diligence_PressRoom.htmhttp://www.astutediligence.com/Diligence_People.htmhttp://www.astutediligence.com/Diligence_Clients.htmhttp://www.astutediligence.com/Diligence_Methodology.htmhttp://www.astutediligence.com/Diligence_BusinessNeed.htmhttp://www.astutediligence.com/Diligence_Mission.htmhttp://www.astutediligence.com/Diligence_Contact.htmhttp://www.astutediligence.com/Diligence_Firm_Offices.htmhttp://www.astutediligence.com/Diligence_Industries.htmhttp://www.astutediligence.com/Diligence_Practice.htmhttp://www.astutediligence.com/Diligence_AboutUs.htmhttp://www.astutediligence.com/default.htm


2/5



ultimately it translates into basic commonsense success factors such as "thinkingthings through" and "do ing your homework".

Why is Due Diligence Conducted?

There are many reasons for conducting due diligence, including the following:

Confirmation that the business is wha t it appears to be;

Identify potential "deal killer" defects in the target and avoid a bad businesstransaction;

Gain information that will be useful for valuing assets, defining representations andwarranties, and/or negotiating price concessions; and

Verification that the transaction complies with investment or acquisition criteria.

Who Conducts Due Diligence?

Lead and co-investors, corporate development staff, attorneys, accountants,investment bankers, loan officers and other professionals involved in a transactionmay have a need or an obligation to conduct independent due diligence. Targetmanagement typically assists these parties in obtaining due diligence information butbecause it is unwise to totally rely on management third party consultants such asAstute Diligence are often brought in to conduct due diligence.

When is Due Diligence Conducted?

Initial data collection and evaluation commences when a business opportunity firstarises and continues throughout the talks. Thorough detailed due diligence is typically

conducted after the parties involved in a proposed transaction have agreed inprinciple that a deal should be pursued and after a preliminary understanding hasbeen reached, but prior to the signing of a binding contract.

How is Due Diligence Conducted?

The parties conducting due diligence generally create a checklist of neededinformation. Management of the target company prepares some of the information.Financial statements, business plans and other documents are reviewed. In addition,
http://www.astutediligence.com/Diligence_Basics.htm#tophttp://www.astutediligence.com/Diligence_Basics.htm#tophttp://www.astutediligence.com/Diligence_Basics.htm#tophttp://www.astutediligence.com/Diligence_Basics.htm#top


3/5



interviews and site visits are conducted. Finally, thorough research is conducted withexternal sources -- including customers, supp liers, industry expe rts, tradeorganizations, market research firms, and others.

How Much Due Diligence Needs to Be Conducted?

There is no correct answer to this question. The amount of due diligence you conductis based on many factors, including prior experiences, the size of the transaction, the

likelihood of closing a transa ction, tolerance for risk, time constraints , cost factors,and resource availability. It is impossible to learn everything about a business but it isimportant to learn enough such that you lower your risks to the appropriate level andmake good, informed business decisions.

Can I Overdo My Due Diligence Effort?

Yes. Too much due diligence can offend a target company to the point where theywalk away from a deal. It can also result in "analysis paralysis" that prevents youfrom completing a transa ction or provides time for a bette r competing offer toemerge. Accordingly, it is important that due diligence be prioritized and executed

expeditiously. Appropriate investigation and verification into the most importantissues often must be balanced by a sensible level of trust concerning lesser issues.

How Much Time is Allocated for Due Diligence Completion?

Time a llocated for completion can vary w idely with ea ch situation. Many preliminaryagreements define the timeframes in which due diligence w ill be conducted. Timeschedules through the closing of a transaction are typically tight -- parties shouldensure that a dequate time is a llocated to due diligence.

How Should I Prioritize Tasks Within the Due Diligence Effort?

Every transaction will have different due diligence priorities. For example, if the mainreason you a re acquiring a company is to get access to a new p roduct they aredeveloping to accelerate your own time to market, then the highest priority task is toensure that the product is near completion, that there are no major obstacles tocompletion, and that the end product will meet your business objectives. In anothertransaction, the highest priority might be to ensure that a major lawsuit is going tobe resolved to your satisfaction.
http://www.astutediligence.com/Diligence_Basics.htm#tophttp://www.astutediligence.com/Diligence_Basics.htm#tophttp://www.astutediligence.com/Diligence_Basics.htm#tophttp://www.astutediligence.com/Diligence_Basics.htm#top


4/5



How Much Does Due Diligence Cost? Who Pays for It?

Due diligence costs are based on the scope and duration of the effort, which in turnare dependent on the complexity of the target business and other factors. Costs aretypically viewed a s an essential expense far outweighed by the anticipated benefitsand the downside risks of failing to conduct adequate due diligence. The involvedparties determine who w ill bear due diligence expense .

How Do You Maintain Confidentiality During a Due Diligence Engagement?

Certain activities conducted during due diligence can breach confidentiality that atransaction is being contemplated. For example, contacting a customer to assesstheir satisfaction with the target company's products might result in a rumorspreading that the company is up for sale. Accordingly, to maintain confidentiality, weoften contact customers under the guise of being a prospective customer, journalist,or industry analyst.

Does Due Diligence Ensure that a Business Transaction Will Be Successful?

A well-run due diligence program cannot guarantee that a business transaction willbe successful. It can only improve the odds . Risk cannot be totally eliminated throughdue diligence and success can never be gua ranteed.

Can I Be Sued for Failing to Conduct Adequate Due Diligence?

In this litigious world, you can be sued for just about anything and failing to conductdue diligence is no exception. Parties involved in a business transaction may findthemselves being sued by their clients, investors, customers, employees, suppliers, or

other third parties asserting failure to conduct proper due diligence or pursuing aliability that was overlooked or incorrectly assessed by due diligence.

Can Using a Due Diligence Consultant Ensure that I Will Not Be Sued?

No. However, conducting proper due diligence may serve as a strong legal defense tothird-party claims after a transa ction closes. Due diligence may also reduce lega lissues by alerting a purchaser or investor to potential liabilities that can be mitigatedin various ways prior to closing the transaction.
http://www.astutediligence.com/Diligence_Basics.htm#tophttp://www.astutediligence.com/Diligence_Basics.htm#tophttp://www.astutediligence.com/Diligence_Basics.htm#tophttp://www.astutediligence.com/Diligence_Basics.htm#tophttp://www.astutediligence.com/Diligence_Basics.htm#top


5/5



Copyr ight 2001-2010. Gaebler Ventures. All rights reserved. Site MapSite design by Chicago Web Design
http://www.walkersands.com/http://www.astutediligence.com/Diligence_Browse_Consulting_Pages.htmhttp://www.gaebler.com/http://www.astutediligence.com/Diligence_Basics.htm#top

what is due diligence - why is due diligence conducted

Documents