How to carry out effective due diligence in evaluating business deals (by staying focus on what is most needed)

Is conducting due diligence in today’s business environment important? You bet! Much more now than ever. From investing into a business to performing corporate social charitable work, it is wise to conduct due diligence on that subject matter. If you do not perform due diligence on the matter or cause that you are going to invest your organization’s time and resources into it, you may be in for a big surprise.

In most situations due diligence is performed on business investments that involves a significant amount of time and resources plus the potential risk that comes along with it. This itself obviously makes the need to perform due diligence a much more important task. And depending on the scale of the business stake, the intensity and scope of the due diligence will be shape accordingly.

Here I will provide a simple guide on how to approach due diligence in a manner that helps you in your business investment. Whilst there is a need to conduct due diligence, you want to conduct it in the most efficient way as a due diligence exercise required a lot of your management and team’s time. All of you will be drawn into the exercise of providing, obtaining, evaluating and seizing up what constitute the right and useful information. So, you want to do it in the most efficient way.

1.      The Fact-Search Stage

At this stage it is purely exploratory in understanding and putting the business case together. There are still so much more to know and comprehend to see if the business investment is aligned to your business objective to produce additional value. Though there can be many aspects to look at, it is highly important to focus on the following.

💥Commercial value – this is an extremely important aspect to understand adequately because without the commercialization into the marketplace being strong, it is very difficult to thrive. You need to analyze the SWOT analyses of the industry players, market dynamics and competitive landscape.

💥Management capabilities – this is the next most important aspect that you need to know clearly because without a capable team, the realization of the commercial value will be at risk. You need to assess the team dynamics, management style, talents composition and their ability to work together and support the longer-term value creation.

 2.     The Fact-Confirming Stage

After having at least, a fair understanding of the business investment and its potential value, all the information that has been obtain thus far need to be confirmed and validated against internal and external facts. Again, there can be many aspects to look at but do focus the following.

💥Financial facts – all that you know of at the fact-search stage should be substantiated by the financials, one way or another! Financials is the main organ within a business that can properly tell what is going on. Therefore, assessing and understanding the financial health, trends and concerns both short and long term need to be the story that validates what you have heard so far. In addition, the financial facts would also indicate how self-sustainable it is to your investment plan.

💥Legal concerns – to ensure that your business investment does not include hidden legal concerns, it is critical to assess what are the committed and legal obligation that are non-negotiable and that may pose significant risk of non-compliance if you have undertaken the ownership of the investment. Also note if any contingent liabilities exist.

💥IT capabilities – today as technology is becoming a more critical and strategic role in many aspects of business growth and operations, it is highly critical to have proper and adequate due diligence to understand the power of existing IT capabilities that support current needs, and the potential investment needed to support future growth. Do not underestimate the scope and potential upgrade and maintenance needed to support an IT system and talent retention.

If the fact-search stage and fact-confirming stage provides enough confidence for the business case to advance further, a further in-depth due diligence can be done. A properly conducted due diligence not only provides a means for risk management but a great learning and familiarization opportunity as well.