Risk Factors to Consider in Due Diligence
Acquiring a company through a sale or merger can be a big milestone for any company. However, it can provide a gateway to more serious problems. Financial losses, legal liabilities, and reputational damage are all possible. In the end, it’s important that companies take the time to examine any new business venture through an in-depth due diligence process.
Due diligence is a process which identifies risky factors. These risk factors are contingent on the nature and type of the business. For example a financial or bank institution may require a greater amount of due diligence than the retail store or an e-commerce company. In the same way, a business with an international presence may need to examine the laws specific to its country that affect its operations more than a local or domestic customer.
Companies must be aware of the possibility that customers could be on sanction lists. This is a crucial investigation that should be carried out prior to entering into any contract into, particularly when the customer has been found guilty of engaging in illegal activities such as bribery or fraud.
In a due diligence process it is crucial to consider the amount of dependence on specific individuals or organizations. For instance, a dependency on the owner-manager or key employees of a company could be an indication of a problem that could result in an unexpected loss when they leave the company. The amount of shares held by the senior management team is also a factor to consider. A high percentage is an indication of good things, whereas any low percentage is a sign of danger.
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