Due diligence is an in-depth investigation of the business’s inventory as well as financials and contracts and intellectual property. It also includes an assessment of any outstanding legal issues that could hinder the acquisition.
Due Diligence plays an important role in any M&A deal, since it aids investors in determining the real worth of a business. Due diligence typically involves looking over confidential documents and signing non-disclosure agreements and non-compete agreements. It is vital that these steps are done in a timely manner to avoid any issues that may negatively impact the agreement, or even cause it to be canceled.
Investors should also check for any concerns about intellectual property, including patents or disputes, as well as licensing. In addition, they should examine the human component of the company and know its culture, such as golden parachutes, severance plans and stock purchase options.
The $9 billion Theranos collapse is a clear reminder to conduct thorough due diligence before investing. Although some of the red flags were obvious, it shouldn’t be an excuse to not go through this procedure. Due diligence can be a difficult, time-consuming process that requires coordination of many stakeholders and the expertise of professionals in various fields. It is important to define the objectives of your due diligence which will help you decide the resources required and what you can get from it. In certain instances you may have to work with outside experts like lawyers, insurance agents and financial or technology experts.