Tips for effective due diligence

Whether it is an acquisition or supplier, in-depth examinations of prospective business associations should be undertaken to identify risks and assist in making informed decisions. To this end, due diligence deserves a systematic effort from start to completion. General manager of LexisNexis governance, risk and compliance division, Rudi Kruger, offers the following tips on due diligence best practices.

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Time allocation

The number of steps in due diligence and each level of intricacy means that a lot of time would be required during the process to ensure that all uncertainties are explored. A proper timeframe will ensure that you are able to thoroughly evaluate each area and identify liabilities, threats and hidden costs.

“In the case of mergers and acquisitions, liabilities such as environmental risks, employee legal claims and other forms of instability may only occur after the deal is processed,” says Kruger. “Other costs can also go undetected if future financial commitments were made, but not yet accounted for on financial statements. Time should be allocated regularly to monitor suppliers, clients and other entities upon which the business relies, thereby ensuring ongoing financial health.”

Leadership evaluation

The reputations, practices and transactions of leaders have an effect on the value of the business, public perception and market reaction. “It is worth evaluating the top individuals of a company, particularly the directors to determine their track records, associations and conflicts of interest such as personal business interests and external sources, should you choose to do business with them,” he says.

Checklists

A checklist keeps progress in perspective. The basic due diligence checklists entail legal and tax; finances and sales; business operations and industry and business assets, expenses and debts. “Further checklists can be drawn up to satisfy the investigations into each area where necessary,” Kruger concludes.