Due diligence is a formal process of reviewing a company’s overall financial, legal, cultural and operational matters. Usually completed when considering acquiring, merging or purchasing a business, due diligence is an essential process to assure and analyze what the company is getting into. Due diligence methods include review of the company’s financial records, legal documents and examination of the property and physical equipment.
Obtaining Financial Statements
A primary due diligence method is obtaining and reviewing a company’s financial records. Documents such as financial statements, audit results, operating costs, profit forecasts, five years of tax returns, quarterly and annual reports and any other documents relating to the company’s financial picture. Completing a thorough review of each document will help assess the current financial situation including future profitability, expenses and tax liabilities.
Another key due diligence method is to complete a thorough investigation of the company’s real estate and physical equipment. A walk-through of any leased or owned properties, stores and work sites should be completed as part of the due diligence process. Reviewing current leases, titles and assessing inventory, machinery, computers and office equipment, furniture is essential in determining the value of the company. Also, seeing and evaluating the condition of the physical space and property will clue you into what will need replacement in the future.
In addition to the financial due diligence methods, legal review must be completed prior to any acquisitions, mergers or purchases. You attorney will review documents such as business structure agreements, company by-laws, recent past and ongoing lawsuits and litigation and licensure. The due diligence legal review should also confirm compliance with any federal and state regulations and that all patents, trademarks and copyrights have been appropriately obtained.
Another consideration during the due diligence process is to review documents such as human resources policies, summary plan documents showing benefits offered to employees, employee handbooks and training agendas. Reviewing these documents and meeting with human resources leaders to understand the employee and corporate culture of the company helps provide continuity to employees if an acquisition or merger should occur.
Francine Richards is a licensed multi-state insurance agent with years of human resources and insurance industry experience. Her work has appeared on Blue Cross Blue Shield websites and newsletters, the Houston Chronicle and The Nest. Richards holds a Bachelor of Arts in communications from the University of Maryland.