“Make sure you perform your due diligence.” A simple statement that can have tremendously far reaching consequences. I work with people interested in buying a business or selling a business, and this statement can almost appears like “boiler plate” language and get glossed over by the parties involved. What does due diligence have to do with running my business or starting my business? – due diligence is just for buying a business .
Due Diligence – Definition
Due Diligence is a term used for a number of concepts involving either the performance of an investigation of a business or person, or the performance of an act with a certain standard of care. It can be a legal obligation, but the term will more commonly apply to voluntary investigations. A common example of due diligence in various industries is the process through which a potential acquirer evaluates a target company or its assets for acquisition.
Originally the term was limited to public offerings of equity investments, but over time it has come to be associated with investigations of private mergers and acquisitions as well. The term has slowly been adapted for use in other situations (per Wikipedia)
Due diligence is essentially a way of preventing unnecessary harm to either party involved in a transaction. This is a definition when read carefully, can be seen as affecting so many aspects of a business owners life that it can almost become a mantra rather than an after thought.
I’ m ready to get that new office space – Upon completion my due diligence.
I am looking at partnering with my largest customer on a project – After I perform my due diligence.
My business has grown such that I need to select a new accountant and attorney – After I complete necessary due diligence.
I am trying to find a new bank willing to provide the needed Line of Credit and need to perform my due diligence on area banks.
Due Diligence In Business
In business transactions, the due diligence process varies for different types of
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companies. The relevant areas of concern may include the financial, legal, labor, tax, IT, environment and market/commercial situation of the company. Other areas include intellectual property, real and personal property, insurance and liability coverage, debt instrument review, employee benefits and labor matters, immigration, and international transactions
In Giving: I have used due diligence in investigating charities and organizations I am interested in sharing my hard earned money with. I am a fan of the KIVA organization which provides micro-financing to entrepreneurs in third world countries and allows them to expand their business and or start a new business. I performed my process of due diligence on KIVA www.kiva.org and like the way my money helps others help themselves, like the fact that little of my donations go toward administration fees, and most of the money gets towards the intended recipient. And my daughter and I can research these financially less fortunate entrepreneurs on their website and choose where, and to who our money goes.
You can call it “doing your homework”, “doing my research”, ” checking out the facts surrounding the matter”, or “fact finding”. Whatever you refer to it as, it is most important that the function is performed before most every important decision. And yes, when looking to buy a business or sell a business you must do your due diligence. How much is enough and how much is too much?- That will be dependent upon what you are performing the due diligence on. I have 2 teenage boys (great kids) that tend “jump first look second”. If you are able to reflect on some of your business decisions and find that you have jumped first/looked second- you will know that you have not performed adequate due diligence. Very often the line for enough/not enough is not so clear. For me my gut will tell me if I “feel” I have performed adequate due diligence to make a good decision. Sometimes the result of performing due diligences will result in you not moving ahead with a deal and or transaction. And sometimes the best deal is the deal we did not do.
Legal Disclaimer – Legally, I assume Due Diligence can take on interpretation and meaning that can be thoroughly debated and defined among lawyers. Do you need legal determination of this term? – for that you will need to perform your own due diligence to determine.
Ive been part of many discussion revolving around starting up a company and how many years to either break even or make a profit. Some people say it is one year others say 2 years, others 3-5 years. For every business reaching this milestone of “break even” or “profit” is different. The measuring stick used and the timeline expected should be considered. Arbitrary goals and time frames should not be set. There are many unknowns in a start up. You can only do so much due diligence on something that has yet to happen – “You dont know what you dont know”- this quote may or may not be from Thomas Edison,- but applies.
