Due diligence in progress
You hear the phrase, Due Diligence in almost anything people do or are doing.
I noticed it is misunderstood or is known by a few entrepreneurs. Because of its importance in all endeavors, I will define what it is and explain why it is like, “Don’t leave home without it”.
While it may not be seen as a general investigation, yet It may include specific elements that can vary based on the situation and the nature of the business.
When properly done, due diligence will protect the interest of all concerned. In the purchase or financial deals, for example, it can uncover potential liabilities and make sure nothing is hidden.
What Is Due Diligence?
Before you set out to do anything, you must sit down to do an initial evaluation of what you want to do – understand and be clear about what is involved (like money, manpower, etc.); the risks involved; the odd for success, envisage likely problems and how to solve them.
You do these or carry out the due diligence, no matter what it is you are trying to do or start, to make sure there was a success at the end, no harm or failure.
It must be emphasized that this exercise is carried out at the onset not after failure is experienced. Though, I don’t know what anybody would want to do without expecting success at the end. Therefore this initial assessment applies to anything one wants to start.
You want to take care of an elderly loved father or mother; you want to check out the performance of your company; you are considering sending your child to college; etc.
A lawyer does due diligence when preparing to defend a client in a law court. So also a realtor when preparing for real estate deals.
To buy a business, there are important considerations to help you know or decide the best business to own. You need to know a set of questions to ask the owner to get a clearer picture of the business like what it has to offer.
All these require due diligence to make sure you come out smiling at the end. Due diligence may require some research – experimentations, asking questions and even test-driving, to secure a full understanding of what you are trying to start.
Importance of Due Diligence
The importance of due diligence can’t be overemphasized. It is like saying, ‘Don’t leave home without it’ in all endeavors.
Without due diligence before starting a business or embarking on anything is like walking with your eyes closed. It is a guide that foretells future success or failure. It is the process of evaluating all aspects of whatever you are trying to do before making up your mind.
In short, it is the exercise of caution which is practiced by either an individual or a business before a decision is made. The words of Warren Buffett fits perfectly in this context: “If you’ve been playing poker for half an hour and you still don’t know who the patsy is, you’re the patsy.”
A person bought a brand new car worth forty thousand dollars for fifteen thousand dollars with the instruction, “Sold as is”. On reaching his house he discovered that the engine of the car was destroyed in an accident. You wonder how the person failed to see the red flag when there were ample opportunities to check out the car first before payment.
The same thing Mr. Buffet was speaking of. There is no chance this happens with due diligence.
What Due Diligence Entails.
Though due diligence is required in all human endeavors, the process may not be the same. A person or company trying to acquire another company may have to involve his accountant and attorney even before the initial formalities are completed, to examine the company’s books’, to see what might incur liabilities or lawsuits in the future; any liens on assets?, etc.
Any person or company trying to buy a company, as a rule, will spend some time at the new company to talk to the employees including the executives about the new company – verifying the market share they claim. This information is more reliable if from ordinary workers.
A knowledgeable person may be sent to check out the equipment, furniture, and fixtures to make sure they are in the conditions reported. And depending on the type of company in question, the prospective new owner may want information about company management, workers, services and competition, etc.
But if the due diligence is about preparing to perform surgery; taking care of a sick person; going into the real estate business; the due diligence will certainly be different. It is more personal and less elaborate than due diligence by a company.
The major problem of due diligence is legitimacy. How reliable are the research information on which you base your choice? How much confidence would you put on information from the company’s employees? The company would show you their ‘books’. How much would you rely on what you see and read?
So, you thread carefully and always check and crosscheck.
Due diligence, even in its glory, is still an imperfect exercise requiring ‘checks and rechecks’. Since one can’t rely too much on paperwork or information from employees concerning their company up for sale, investigators must be deliberate and act with caution.
The level and complexity of a due diligence process may be determined by the asset in question. There are experts in this business that will require little or no help to complete
Now there is the internet to turn to for all your information. But there are many situations where seasoned hands may be needed. The worst thing that can happen in this process is not seeking help from the experts. And also the time to start the process is crucial and should start the ball rolling.
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