What happens when a company wants to enter a new business
partnership? How can they be sure it’s a wise move?
The only way to determine the safety and value of a potential
business transaction is by conducting a thorough investigation with the help of
a due diligence checklist.
What is Due Diligence?
Merriam-Webster defines due diligence as:
“Research and analysis of a company or organization done
in preparation for a business transaction (such as a corporate merger or
purchase of securities).”
This is a crucial process typically used by investors and
companies who are considering making a significant transaction such as the
purchase of new equipment, when merging with another company, going into a
joint venture or large contract, when buying a new property, or when adopting a
new business information system into their operations.
Due diligence is a way for companies to practice caution and
protect themselves by carefully reviewing all the risks and costs that stem
from a big purchase. It is an in-depth investigation of the other party: their
financial records, their operational practices, and an evaluation of their
assets and liabilities. It’s a necessary process for discovering and avoiding
any potential problems from occurring in the future.
Now that we’ve broken down the concept, let’s dive into the
nitty-gritty: figuring out what data is necessary for a good due diligence
checklist.
What is a Due Diligence Checklist?
It’s a document that includes all the essential data that the
auditor must collect from their target before moving forward with their
decision. It allows those conducting the due diligence audit to keep track of
their progress so that they don't leave out essential data that will prevent
them from making informed decisions during the deal's lifecycle.
What does a Due Diligence Checklist Include?
We asked our team of research and analysis specialists at
Cedar Rose to identify what’s essential to include in due diligence checklists
and evaluations. With over 25 years of experience conducting due diligence
checks, we know what we’re talking about! The result boils down to these five
essential categories:
1.Legal
Collect any paperwork that will help you understand and assess any legal risks that arise as a result of the transaction. It’s crucial to identify whether the target in question operates lawfully or if it has any significant legal issues. It also includes copies of commercial licenses (when made publicly available) to understand whether the company is active in the first place and to help our clients verify the commercial documents that they may have obtained already.
2. Compliance and Regulatory Matters
Regulatory due diligence is an in-depth evaluation of the
regulatory compliance status of a company and its projects. The goal is to discover
any regulatory inconsistencies that can decrease the value of the asset you
wish to purchase. If you want to save your money, do your homework!
3.Commercial
This area of due diligence allows the acquirer to determine the commercial appeal and value of the company they’re purchasing. It analyses the market and how successful that company could be in that market. It requires a vast set of documents that covers the company's suppliers, commercial policies and customers.
4.Marketing
Unsurprisingly, the marketing audit helps buyers understand how a company markets itself. Vitally, though, it also helps identify what position it has within its specific market.
5.Financial
One of the most critical areas when conducting due
diligence, it helps buyers understand whether the company is financially
stable, its market value and if it has potential for growth. More importantly, financial due diligence investigates how accurate
the financial records are and whether the target has any fundamental issues.
Due Diligence at Cedar Rose
At Cedar Rose, we offer five customizable levels of due diligence to help our customers assess and mitigate many of the risks mentioned in the checklist as part of the Know-Your-Client (KYC) process.
The first level, and what we’d recommend as a suitable
starting point for every occasion, is Simplified Due Diligence. This
check is perfect for instances where there is a small chance of risk that a
business partner will become involved with illegal activities, such as money
laundering, and when you only wish to authenticate the identity of your
customer or business partner.
The second level is Standard (Plus) Due Diligence. It
is the ideal solution for getting a more in-depth understanding of a
prospective partner where we have already identified their potential risk level
and determined that the chance of that risk materialising is minimal.
At the third level, we have Enhanced Due Diligence
and Customer Due Diligence. Both checks aim to give our clients a more
comprehensive understanding of their most valued or high-risk business
relationships. And of those, it identifies where our research has raised red
flags regarding their legitimacy and trustworthiness.
The fourth due diligence evaluation is the Local Reputation Investigation (Source Enquiries). Here we perform multiple checks to determine what your
business partner's reputation is. For this, we use informal sources to
determine the following:
- The target’s network (Commercial/Professional/Institutional/Political)
- If there is evidence of involvement in financial crime
- If there are links with terrorism groups
- What the extent of their social and environmental responsibility is
- Other general reputational checks
Finally, we have Ultimate Beneficial Ownership (UBO),
where we use official corporate information to reveal the company’s UBO
structure and the individual(s) who are the primary beneficial owner(s). Contact us if you would like this type of investigation.
All five investigations are handled without the subject
being notified and with the utmost confidentiality.
Final Thoughts
Due Diligence is a vital tool for assessing the real value
of a business deal. Without first performing a due diligence check before
following through with a sizeable business deal, you could end up significantly
harming your business in multiple ways. Not only will you potentially lose a
large sum of money, but you could also damage your reputation and lose the
confidence of your customers and partners.
A due diligence checklist is a highly effective method to
keep you organised and on track while you are doing an audit. Powered by our experts at Cedar Rose, the above list is an excellent starting
point for your inspection. However, keep in mind that every business deal is
unique, and therefore, each transaction might carry different requirements - or
need you to be diligent in other areas!
When you want to perform an audit, our five customizable due diligence checks are essential. We take great pride and effort to ensure that our database is as accurate as possible, because it is a critical aid to the credit and due diligence reports we perform on behalf of our clients.
For more information on our due diligence services, give us a call today on +357 25 346630 or email info@cedar-rose.com