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Due diligence works by ensuring that everyone is informed about the possibility of a transaction. They can then assess the risks and benefits of a deal. Due diligence can help keep from surprises that could cause delays to an agreement or cause legal issues after the deal has been concluded.
In general companies conduct due diligence prior buying a business, or merging with a different company. The process usually includes two main parts of due diligence on financials and legal due diligence.
Financial due diligence is the process of analyzing the company’s assets and its liabilities. It also examines the company’s financial records and accounting practices, as well as its compliance with the laws. During due diligence, many companies request for copies or audits of financial statements. Other areas of due diligence include supplier concentration and human rights impact assessment (HRIA).
Legal due diligence focuses on the company’s policies and procedures. This includes a review of the company’s standing in relation to its legality as well as compliance with the law and regulations and any legal disputes.
Depending on the type of purchase Due diligence can take up to 90 days or more. During this period the parties usually agree on an exclusive agreement. This stops the seller from pursue other buyers or to continue discussions. This can be advantageous for a seller but can also backfire if the due diligence process was not conducted properly.
It is essential to remember that due diligence isn’t an event, but a process. It is a procedure that takes time and should not be rushed. It is crucial to keep open communications and, if feasible, to meet or surpass deadlines. If a deadline is missed, it is important to understand the reason for the delay and what steps can be taken to rectify the problem.
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