Acquiring a business through a merger or sale could be a big milestone for any company. However, it could also open the door to serious issues. This includes legal liability in the form of financial losses, reputational damage and legal damage. As a result, it’s important that companies make the effort to evaluate any new business venture by undergoing an in-depth due diligence process.
Due diligence is a procedure which identifies risky factors. These risk factors are dependent on the type and nature of the business. A bank or financial institution for instance, may require a greater amount of due diligence than retailers or ecommerce businesses. Similar to a company that has an international footprint might need to review the country-specific laws that affect its operations more than a domestic local customer.
A key risk factor that companies must look out for is whether a customer is on a list of sanctions. This is a crucial check which should be done prior to any contract is signed, especially in cases where the customer may have engaged in illegal activities like bribery or fraud.
Other crucial aspects to consider in a due diligence process include the dependence on specific individuals or entities. A company’s dependence on its owners or key employees could be a red flag which could result in unexpected losses if the employee suddenly quits the company. The amount of shares owned by senior management is something to be considered. A high percentage of ownership is a positive indication, whereas low levels are a red flag sign.
