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Due diligence involves a thorough review of the company’s inventory as well as financials and contracts as well as intellectual property. It also includes an review of any legal matters that could impact the acquisition.
Due Diligence is a vital element of any M&A transaction, and it aids investors to determine the true value of a business. Most of the time due diligence involves examining documents that are confidential and requires the signing of non-disclosure or non-compete agreements. It’s vital that these processes are completed thoroughly to avoid any potential problems that could adversely affect the agreement or lead to it not being completed.
Investors should also be looking for any issues with intellectual property which include patents or disputes, as well as licensing. Investors should also take a look at the culture of the business and its severance plan, golden parachutes, and stock purchase options.
The $9 billion Theranos collapse is a stark warning to conduct a thorough due diligence before investing. Although many of the red flags were evident, it shouldn’t be an excuse to skip this step. Due diligence is a time-consuming and tedious job that requires coordination between various stakeholders and the expertise of professionals in various areas. It is important to define the goals of your due diligence which will allow you to determine the resources required and what to glean from it. In certain instances you may have to engage outside experts like lawyers, insurance agents and financial or technology experts.