Article
Written by Zahra Saeed
Posted on 21/01/2015

Implementing a due diligence process before the deal is closed

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Whether you’re planning the acquisition of a company or simply considering issuing a line of credit to a client, carrying out due diligence checks before sealing the deal is an essential process. It will not only help you to make a more informed decision by revealing any hidden issues associated with the business in question, but can also reduce the risk of bad debt and other problems that could affect cash flow. The processes you should implement depend on the type of deal in question. However, in all cases it is important to instil the importance of due diligence to all employees. Stress that it is not simply a tick-box exercise to appease the powers-that-be and make sure that they are aware of any processes you have in place. Here are three common situations where we recommend due diligence before taking the plunge:

When considering an acquisition

Your company’s doing great financially and you’re in a position to buy out another business. Before making this significant step, due diligence is crucial - or you may not remain in such a buoyant financial position for very long.

Due diligence practices in the case of acquisitions and mergers traditionally require in-depth examination of documents such as financial statements, inventories and intellectual property rights. But it’s equally important to investigate why the business has been put on the market. Is it simply a question of releasing funds for retirement, or are there darker issues at play, such as a pending lawsuit?

Another vital check involves the company’s assets and liabilities. What assets are needed for the business to remain operational? What is the true value of the assets if they’re sold on the open market? When it comes to liabilities, does the company owe any overdue payments? What about a lease on a commercial property that could prove onerous?

Finally, it’s worth sizing up the competition of your intended acquisition. Look into its three main rivals and compare margins. This may also help to determine the size of the target market- and the potential sales volumes for you.

When moving into an international market

The world might be your oyster in today’s globalised business setting, but before you make that first commercial step into foreign climes, remember to implement a robust due diligence checklist.

It might be a good starting point to hire a specialist in international trade laws – and ideally one with specialist knowledge of the country in question – to make a risk-based assessment before going ahead with the contract. They should also be able to advise you on the working ethos of the country in question. Will they stick to deadlines? Might you have to deal with a culture of corruption or bribery?

If you’re exporting goods, always try to obtain a credit rating and reputable references for any buyers before shipping any products overseas. When it comes to international supply chains – both when exporting and importing – it’s crucial to bear in mind any political or environmental risks. Of course, natural disasters such as the 2011 Japanese earthquake (which significantly affected supply chains across the U.S.) could not have been predicted, but it is still possible to assess the political stability of a country, for example.

If you’re planning to establish premises abroad, your due diligence process should also extend to considering any environmental concerns and legal obligations you might have.

When taking on a new client

The lure of new business is understandably tantalising, but don’t forget to conduct due diligence processes before committing to a new sale. Always carry out a credit check to ensure that the company is financially stable and able to honour payments. Most good credit risk management consultancies will offer this service for free, so you have nothing to lose and a lot to gain by taking the time to do so.

Your new client may also be able to provide bank or trade references – and don’t hesitate to ask them for these, especially when there are big payments or a long line of credit at stake.

Remember that the internet is your friend when it comes to investigating a potential client. From reviews and testimonials from other suppliers to the client’s own social media, there’s a wealth of information available with just a click of a button.

Want to know more about improving your due diligence processes?

Find out more about improving your due diligence