Due diligence involves a thorough analysis of the inventory of the business, financials and contracts, and intellectual property. It also consists of an assessment of any outstanding legal issues that could impact the acquisition.
Due Diligence plays a vital role in any M&A deal because it helps investors determine the real value of a company. Due diligence often involves reviewing confidential documents and signing non-disclosure agreements and non-compete agreements. These processes must be carried out thoroughly to avoid any issues that could adversely affect the contract, or cause it to fall through.
Investors should also check for any concerns regarding intellectual property rights, such as patents and disputes, as well as licensing. Investors should also look at the culture of the business which includes its severance policy gold parachutes and stock purchase options.
The $9 billion Theranos collapse is a stark warning to conduct a thorough due diligence prior to investing. While some of the red flags were evident, it shouldn’t be an excuse to not go through the process. Due diligence can be a tedious task that takes a lot of time and requires coordination of many stakeholders and the expertise of professionals in a variety of areas. It is important to define the objectives of your due diligence, which will help you decide the resources required and what you can learn from it. In some instances this might mean involving external experts, such as attorneys, insurance agents, or consultants in technology or financial matters.