A merger or sale could be a significant event for a company. However, it can also open the door to serious problems. Legal liabilities, financial losses and reputational damage are all possible. Due diligence is a process that allows businesses to thoroughly examine any new venture.
Due diligence is a procedure that determines risk factors. These risks are based on the nature and type of the business. For instance the bank or financial institution might require a more rigorous level of due diligence than the retail store or an e-commerce company. Similarly, a company with an international presence might need to examine the laws specific to its country that affect its operations more than a domestic, local customer.
Companies should be aware the fact that customers may appear on sanction lists. This is a crucial examination that must be carried out before any contract is signed into, especially in the event that the client has been identified as having engaged in illegal acts such as bribery and fraud.
In a due diligence process it is crucial to consider the extent of dependence on specific individuals or entities. For instance, a dependency on the manager of the company or the owner employees of a company could be an indicator that could result in an unexpected loss in the event that they suddenly quit the company. Another consideration is the amount of share ownership owned by the senior management. A high percentage of ownership is a good indicator, while low levels are a red flag signal.
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