Managing Your Financial Risk: The Due Diligence Checklist

Managing Your Financial Risk: The Due Diligence Checklist

When you set out to buy a business, how do you know it's the right investment?

Here's a hint: it's not magic. There are no psychics, no mathematical predictions, and no sales pitches. Okay, there are some sales pitches, but the meat of a business's value is uncovered during due diligence, the process of confirming what you think you know about a business.

And if you want to do due diligence well, you need a plan. That's where a well-structured due diligence checklist can make the difference between a smart investment and financial ruin. Here's a quick overview of what to include in your checklist.

What is Due Diligence?

Think of due diligence as doing your homework-but on a corporate level.

In plain English, due diligence is simply an audit, review, or investigation to confirm facts. In the financial world, due diligence is conducted to confirm the value of a business through a systematic investigation of the business's history and details, typically in the process of purchasing that business. For example, in mergers and acquisitions (M&A), due diligence is a detailed investigation of a business's financial records.

This is more than just dotting your i's and crossing your t's. Under the Securities Act of 1933, dealers and securities brokers are legally obligated to disclose information about the financial instruments they sell--or face criminal prosecution. The act includes a caveat that as long as brokers exercise "due diligence" on the companies they sell and fully disclose the results of that due diligence, they cannot be held liable for information not discovered in the investigation.

In other words, you're not just making sure this is a good investment. You're saving yourself money in the long run by making sure you do things right.

The Due Diligence Process

In M&A, the due diligence process involves the following components:

  • Overview of the target company
  • Financial records
  • Review of technology and patents
  • Examination of strategic fit
  • Examination of the target/customer base
  • Details of management and the workforce
  • Breakdown of any legal concerns

Broadly speaking, due diligence consists of external and internal analysis. For example, in external analysis, you might look at the company's competitive position in the current market, including market trends and supply or demand shifts. However, the more important element is internal analysis, which addresses any major red flags about the strength and character of the company.

Your Due Diligence Checklist

With that in mind, your due diligence checklist should include things like:

  • External analysis (competitive landscape, market trends, etc.)
  • Financial due diligence (financial records, performance, etc.)
  • Investment context and equity distribution
  • Business model
  • Business product or service
  • Production capabilities
  • Supply chain
  • Organizational structure and management

Keep in mind that due diligence can also include things like site inspections, either virtual or on-site. The business's physical locations (and the state they're in) are just as telling of business health and mentality as financial records.

Think of your due diligence checklist as a road map through every detail you need to know about the target business. By the end of the process, there should be no stone left unturned and no surprises lurking in the bushes, and you should have a complete picture of what you're getting into.

The Smarter Way to Mitigate Risk

Your due diligence checklist is a springboard for understanding your investment. But when it's time to make due diligence happen, we're the partner you need to eliminate surprises and make the right investment.

We've spent almost twenty years helping businesses like you find smarter ways to stay compliant. We help save time and money by giving you the tools you need to make smart risk management decisions.

Ready to find out how we can support your business success? Click here to start the conversation.

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