In today’s business landscape, due diligence should be a non-negotiable aspect of a company’s operations. A comprehensive due diligence program will not only help ensure compliance with the numerous regulatory standards in place around the globe, but also assist in developing and executing a sound risk management program. As new risks emerge and regulators continue doubling down on enforcement, due diligence services will only continue to grow in importance.
Effective due diligence can help identify potential problems, uncover opportunities to improve current operations, and assist a company with preparing for growth. However, relying on an in-house due diligence team may not always be what’s best for your business, as not all due diligence is equal. Certain business activities or deals in high-risk sectors will present unique risks and challenges that extend beyond the capabilities of smaller internal teams. Missteps or oversights by a company during the due diligence process prior to a major investment or joint venture transaction can create significant financial, reputational, and legal hurdles, and sometimes lead to adverse consequences for the risk that is inherited. That’s when engaging a skilled, seasoned due diligence provider becomes a strategic asset essential to not only meeting compliance standards, but also developing a sustainable competitive advantage.
A due diligence provider can provide you with valuable insights and analysis that can help you make informed decisions about whether or not to invest in a particular company, enter into a new business relationship (i.e., joint venture), contract with an outside third-party service provider, or engage with a high-net-worth individual (in case of a financial institution), all while helping you meet state and federal compliance guidelines and providing valuable insight. The ideal outcome is to provide you with actionable information to allow you to make a quick decision, no matter the use case or need for diligence.
Outside of helping companies avoid legal, financial, and reputational damage, there are numerous other benefits to working with a due diligence provider, including:
- Expertise: Due diligence providers have the knowledge and experience to thoroughly review and evaluate a company, which can be especially helpful if you are not familiar with the industry or sector in which the company operates.
- Objectivity: A due diligence provider is an independent third party, which means they can provide unbiased and objective insights that can help you make more informed decisions and stay ahead of potential risks.
- Time Saved: Conducting due diligence can be a time-consuming process, especially if you are not familiar with the industry or sector. Working with a due diligence provider can help save you time and effort, while ensuring that compliance with legislation in different jurisdictions is met.
- Cost-effectiveness: Hiring a due diligence provider can at times be more cost-effective than attempting to conduct due diligence through an in-house team. This is especially true if your organization does not have the necessary research and data resources or requisite expertise.
From a general perspective, there are three common reasons why a business may want to enlist a qualified due diligence services provider.
Mergers and acquisitions (M&A) are a valuable tool for businesses or investors looking to grow their revenue potential or expand into new markets. Regardless of whether you’re buying or selling, it is essential for all parties involved to fully understand the proposed transaction, the opposing party, and the risks and opportunities associated with the merger.
A due diligence partner for M&A transactions can help businesses navigate a number of important facets of a deal, including:
- Verifying information: “Ask but verify.” It’s imperative to compile all the relevant facts, financial information, and any other pertinent matters that may surface during an M&A deal or throughout the investment process.
- Identifying potential defects: Confirming the actual status of a buyer or investor as a business enterprise can be undermined when internal due diligence results in cutting corners or proceeding based on errant presumptions.
- Solidifying valuations: Often operating under pressure to consummate a deal and with the fate of the business at stake in some cases, internal due diligence teams (particularly at companies that are the target of a buyer) can inadvertently undervalue assets, such as technology assets or intellectual property. External due diligence professionals can conduct research that goes beyond historical financial statements to help ensure the accuracy of valuations.
- Confirming the terms of the deal: A qualified outside due diligence provider is much more likely to maintain the appropriate distance from their client, enabling them to help keep them on track and on target throughout the deal process.
- Ensuring legality at all stages: Experienced legal counsel, usually recommended by an advisor, will help ensure that any potential legal wrinkles are identified early in the process and that a transaction remains on solid legal ground.
With ESG and human rights concerns top of mind for stakeholders, consumers, and regulators, businesses can’t afford to be linked to entities with abusive or illicit business practices. Supply chain due diligence plays a crucial role in identifying the risks associated with certain third-party business partners and vendors. A company’s suppliers may be involved in activities that could be illegal or unethical, such as using child labor, violating environmental regulations, or engaging in corrupt practices. Conducting supply chain due diligence and third-party screening can help a company ensure that it is not indirectly supporting or benefiting from such activities, thus protecting itself from legal and reputational damage.
Supply chain due diligence best practices are constantly evolving as new legislation is introduced around the world to better protect workers, vulnerable communities, and the environment. The rapidly shifting landscape of supply chain compliance can be difficult for smaller, in-house teams to navigate — especially when international business comes into play. Many companies do not have the technology or knowledge needed to conduct thorough ongoing third-party due diligence. A due diligence vendor will be better equipped to vet potential suppliers, and provide your business with visibility, transparency, and assurance that regulatory requirements have been met.
When conducting business on an international scale, some jurisdictions and industries carry higher degrees of risk than others. Operating in these higher-risk jurisdictions carries a unique set of due diligence challenges that stem from the need for familiarity with the local political and economic climate to understanding the potential risks and opportunities in the region. Understanding local laws and regulations, as well as the cultural and social norms of the area, can also be crucial when conducting research and engaging with third-party partners.
Selecting a due diligence partner with global expertise is highly recommended, as they’ll have the knowledge, resources, and expertise necessary to identify illegal business practices, unethical behavior, and other red flags in the higher-risk jurisdictions.
For these high-risk areas, enhanced due diligence and comprehensive record reviews conducted by a team of experienced professionals will likely be required in order to paint an accurate picture of the risks your business may be exposed to. In cases such as this, where potential risk exposure is high, the initial cost of hiring a due diligence provider is often less than the financial and legal damages that can arise from violations and regulatory enforcements that result from significant lapses in due diligence.
There are many steps that go into selecting the right due diligence provider. Among the most important is having a formal methodology led by a dedicated team responsible for ultimately choosing the provider and managing the relationship.
Getting to that point entails completing a checklist of steps that includes accurately understanding your business goals, obtaining documentation from reputable candidate providers, analyzing the findings, and properly screening the potential providers to ensure the u;timate preferred due diligence provider:
- Demonstrates appropriate levels of experience via its management team and research staff concerning enhanced due diligence capabilities — can the provider show redacted sample reports? Willing to conduct a test case for no fee in any jurisdiction around the globe?
- Provides global coverage with every major language covered via internal research staff
- Thoroughly understands your business and industry
- Understands the unique risks your business faces and the need for regulatory compliance
- Compiles, stores, and transmits data in compliance with laws concerning data management and security
- Is willing to work closely with legal counsel during due diligence
- Is completely transparent in working with you
Today’s financial and business environments bristle with ever-increasing regulations, leaner business practices, and increasingly sophisticated technology. It is the responsibility of company management to apply a rigorous process in selecting a due diligence provider. A comprehensive due diligence program will identify the optimal service provider, minimize risk and help ensure high-quality results.
Get in touch with the IntegrityRisk team today to learn more about our robust due diligence service offerings.