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You wouldn’t leave your children in the care of a stranger. You wouldn’t go away for a two-week vacation with your house left unlocked. But how well do you know the people and companies with whom you are doing business? Opening up your business to the wrong person can expose you to serious risks, ranging from fraud to negative publicity to civil or criminal liability. These risks can be mitigated with the appropriate level of due diligence.
Due diligence is a term often mentioned but rarely explained. Simply put, due diligence is the organized approach to gathering information about the relevant facts surrounding a business transaction. Regardless of whether you are hiring a new controller, recruiting a new board member, or engaging in a business combination, more information means less risk. Verifying the details of the background of a key employee or ensuring the accuracy and completeness of disclosures made in the course of a corporate finance transaction can save you immeasurable costs.
The nature and extent of the due diligence process undertaken will vary with the size and sensitivity of the matter. Gone are the days when a simple reference check over the phone or even a basic Google search would give you sufficient peace of mind in all instances. The provider screened the references before you ever see them. The Internet has infinitely more information available than a simple search engine check will reveal. A few areas of examination in the due diligence process may include:
The due diligence process need not – in fact, should not – be conducted covertly. Business transactions at this level invariably start with negotiation. Letting the other party know that you intend to conduct a due diligence review at the outset may deter some of those with bad intentions. It also provides an opportunity to obtain the other party’s consent, facilitating the gathering of certain pieces of information that may be difficult to obtain otherwise. This sets the tone for your future transactions as transparent and ethical, enhancing your overall image in your operating environment.
A proper due diligence report may cause you to think twice before giving sole signing authority on company accounts to the prospective hire, or encourage you to look elsewhere before filling a key role in your organization. For corporate finance transactions, the results of the review may cause you to move ahead with confidence, to adjust the transaction price to account for the identified risks, make pertinent contractual changes, or scrap the deal altogether. In any instance, the time and money invested in due diligence – like the lock on your front door – just might save you from unforeseen consequences.
By Greg Draper, Investigative and Forensic Services Leader. For more information, please contact your local MNP advisor or Greg at 1.877.500.0792.
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