In the world of business, the phrase “Don’t consider a deal until you’ve completed your due diligence” is frequently repeated. It’s true that the consequences of failing to perform thorough due diligence for your company and valuation can be catastrophic, both financially and reputationally.
Due diligence for a company involves looking over all the information that buyers will require to make an informed decision on whether or not to acquire an enterprise. Due diligence also helps identify potential risks and provides the basis for capturing value over the long-term.
Financial due diligence focuses on the accuracy of a target company’s income statements as well as balance sheets and cash flows, along with reviewing pertinent footnotes. This involves identifying any unrecorded liabilities or assets that are not recorded, or understated revenue that could be detrimental to the value of a business.
Operational due diligence is, in contrast, focuses on a company’s capability to function independently of its parent company. At AaronRichards we analyze the ability of a target company to scale its operations, increase capacity utilization and supply chain performance, among other things.
Management and Leadership – This is a key element of due diligence as it reveals how important the current owners are to the success of the company. If the company was established by a family member, for instance, it’s important to determine if there is any resistance or a refusal to sell.
Valuation is the last step of the due diligence process which is where investors evaluate the long term worth of a company. There are a variety of methods to evaluate this. It is crucial to select the appropriate method dependent on factors such as the size of the company optimize data organization with efficient data room management and the industry.
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