Risk Factors to Consider in Due Diligence

Acquiring a company through an acquisition or merger could be a significant event for any company. However, it could also create the possibility of serious problems. Financial losses, legal liabilities and reputational damage are all possibilities. Due diligence is a procedure which allows companies to carefully analyze any new venture.

Due diligence is a method that identifies risk factors. These risk factors are based on the nature and type of the business. Banks or financial institutions for instance, might require a higher degree of due diligence than retail stores or ecommerce companies. A company with a global reach may need to review country-specific laws that affect its operations more than a single domestic customer.

Businesses should be aware of the possibility that their customers will appear on sanctions lists. This is a vital investigation that should be carried out before any contract is entered into, especially when the customer has been found to have engaged illegal activities like bribery and fraud.

In a due diligence process it is essential to consider the extent of dependence on specific individuals or organizations. A company’s dependence on owners or key employees may be a red flag which could result in unexpected losses if an employee suddenly quits the company. The amount of shares held by senior management is also an important aspect to take into account. A high percentage is positive, while website link a low level is a red flag.