A merger or sale could be a significant event for a company. It can also trigger serious problems. This includes legal liability, financial losses, and reputational damage. Due diligence is a method that allows companies to thoroughly analyze any new venture.
The risk factors that are discovered during due diligence are mostly dependent on the type of business and the nature of the client. A financial institution or bank for instance, could require a greater amount of due diligence than retail stores or ecommerce companies. In the same way, a business with an international presence may need to examine the laws specific to its country that affect its operations more than a domestic local customer.
Companies should be aware of the possibility that their customers will appear on sanctions lists. This is a critical investigation that should be carried out before any contract is entered into, particularly in cases where the customer has been found to have engaged in illicit activities such as bribery, or fraud.
Other crucial aspects to consider during a due diligence exercise include the reliance on any specific individuals or entities. A company’s dependence on its owners or key employees may be a red signal that could lead unexpected losses if the employee leaves the company suddenly. Another consideration is the amount of share ownership held by top management. A high percentage of ownership is a positive sign, while low levels are a red flag sign.