Morne Patterson – The Key Components of Due Diligence

Due diligence is an important process which entails the investigation of a potential investment or product to confirm all facts, such as reviewing the financial records, commercial drivers and technology stack. The purpose of due diligence is to confirm that all material facts are disclosed and evaluated prior to the investment. It is commonly performed when buying or selling a business, obtaining third party funding or entering a strategic business relationship.

Morne Patterson – The Key Components of Due Diligence

Financial Due Diligence

This is the process of reviewing a company's financial information to assess its financial health and performance. The goal of financial due diligence is to identify any potential financial risks or opportunities. The evaluation includes reviewing historical financial statements, budgets, forecasts, tax returns, debt obligations, credit history and liquidity requirements.

 

Commercial Due Diligence

Commercial Due Diligence entails the investigation of the commercial aspects of a business in order to understand its key performance indicators, evaluate its market position, revenue potential, and growth opportunities. Areas focused on include competitor analysis, the customer base, key supplier relationships, and industry advantages. The goal of commercial due diligence is to identify any key business risks or opportunities associated with the investment. These risks and opportunities are better understood when evaluated with the findings from the financial due diligence.

 

Legal Due Diligence

Legal due diligence is the process of reviewing the company's legal documents and records to ensure that the company is compliant with all relevant laws and regulations. The goal of legal due diligence is to identify any potential legal risks or liabilities associated with the investment. This process includes reviewing contracts, agreements, licenses, permits, and other legal documents. The team will review any ongoing or potential legal disputes as well as the company's intellectual property rights, such as patents, trademarks, and copyrights

 

Operational Due Diligence

Operational due diligence includes investigating and evaluating the operations, management team, and systems to assess their efficiency and effectiveness. The main goal of operational due diligence is to identify any potential operational risks which could undermine an investment. This includes reviewing the target company's organisational structure, management team, processes, systems, and controls. A common operational risk is key man dependency which prospective investors often aim to mitigate through employee retention clauses being included in the transaction documents.

 

Technology Due Diligence

This includes evaluating a company's technology assets, its software, hardware, and intellectual property. During technology due diligence, the due diligence team will review the target company's technology platform, software, hardware, and any proprietary technology or intellectual property. They will also investigate that all proprietary developed software is formally owned, doesn’t infringe third party rights, and is aligned with the strategic objectives identified in the commercial due diligence leg. This process will help to assess the target company's ability to protect its technology assets and maintain a competitive advantage in the marketplace.

 

Conclusion

Although there are other areas covering due diligence, these 5 are the most common and important parts of the process. These investigations can either be carried out directly by the investor, or with the help of specialists who evaluate investment opportunities.


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