The due diligence process is an in-depth review of equipment, inventory financials, contracts, and intellectual property. It also involves an examination of any outstanding legal issues that could affect the acquisition.
Due Diligence is a crucial element in any M&A deal because it assists investors to determine the real value of a business. Due diligence usually involves reviewing confidential documents, and also signing non-disclosure agreements and non-compete agreements. These processes must be completed completely to avoid any issues that could adversely affect the agreement, or cause it to fall through.
Investors should also check for any concerns related to intellectual property rights, such as patents and disputes, as well as licensing. In addition, they should take a look at the people aspect of the business and learn about its culture, including golden parachutes, severance packages and stock purchase options.
The $9 billion loss of Theranos is a stark reminder that you should always do thorough due diligence prior to investing. Although many of the red-flags were obvious, it shouldn’t be reason enough to ignore this procedure. Due diligence can be a tedious, time-consuming process that requires coordination of many stakeholders and the expertise of experts in a variety of fields. It is essential to establish the purpose of due diligence. This will allow you to determine what resources are needed and how best to utilize them. In some cases this might mean involving external experts such as attorneys, insurance agents, or financial or technology consultants.