DUE DILIGENCE IN ACTION
Due diligence has wider applications than is often assumed. Properly executed, due diligence can prevent potential issues in hiring, real estate transactions, mergers and acquisitions, startup investing, and more.
What is Due Diligence?
Due diligence is a comprehensive review of a business or an individual to ensure that potential risks and benefits are understood before entering into a contract or an agreement. According to Merriam-Webster, “due diligence has been used since at least the mid-fifteenth century in the literal sense ‘requisite effort’.” This usually includes a deep dive into financial records, legal records, operations, and other items of relevance. The information generated by this “requisite effort” is essential for making informed decisions, minimizing risks, and ensuring successful outcomes in deals and transactions.
Due Diligence in Hiring
Due diligence is an essential step in the hiring process, helping companies select the right candidates and avoid potential problems. For hiring purposes, due diligence should include a thorough review of a candidate’s employment history, education, references, and any relevant licensures and certifications. In addition to identifying discrepancies in a candidate’s telling of his or her history, due diligence can identify red flags like past criminal records, disciplinary actions, or employment-related legal issues. Thoroughly vetting a candidate can help mitigate future risks like poor performance, workplace conflicts, or legal troubles.
Due Diligence in Real Estate Transactions
Due diligence can be key to avoiding setbacks in real estate transactions. Due diligence in real estate transactions should include an examination of the property’s legal history for disputes and zoning issues, a detailed analysis to examine whether the property is accurately valued, and whether it is encumbered by liens, mortgages, or unpaid taxes. A market analysis of neighborhood trends and potential future value and a review of homeowners’ association or zoning rules can also be important. While industry experts predict sellers will “continue to have the upper hand in the housing market” in 2024, due diligence can help buyers make better-informed decisions to identify and manage risks.
Due Diligence in Mergers and Acquisitions
Due diligence is commonly associated with transactions related to mergers and acquisitions. Due diligence in this regard often includes an examination of existing contracts to understand all agreements and commitments, financial statements to identify any discrepancies or irregularities, and audits and tax matters, according to Forbes. A review of legal liabilities such as employment discrimination or sexual harassment lawsuits, intellectual property issues, or regulatory compliance issues is also a necessary step. A due diligence plan crafted to reflect the company and its industry is critical to helping companies ensure a successful merger.
Due Diligence in Startup Investing
While due diligence is commonly associated with transactions involving established entities, it can also assist in identifying and minimizing risks in new ventures as well. Due diligence for startups should include a review of regulatory and legal filings, a careful investigation of the company’s patents, trademarks, and copyrights, and a comprehensive market analysis to identify the competitive landscape and target audience. Take the case of Theranos founder and CEO Elizabeth Holmes, who was sentenced to more than 11 years in prison for defrauding investors. The New York Times reported Holmes raised $700 million “without ever having to provide financial statements audited by an independent public accounting firm.” Due diligence can help investors identify potential red flags and market or legal vulnerabilities.
Conclusion
Due diligence is not limited to those acquiring a company or investing in a startup and has a variety of real-world applications. For hiring managers, due diligence can foster a safer, more productive work environment and help support the long-term success of the company. For buyers in real estate transactions, due diligence can manage risks and protect their investment. To learn more about how due diligence can minimize risks and increase the likelihood of success in your business transactions, reach out to inVeritas.