What Is Due Diligence and When Is It Needed?
In all too many companies, the leadership sees “due diligence” documentation as something that’s only needed for mergers and acquisitions – and therefore not something that needs to be updated and available on an ongoing basis.
Unfortunately, this is a short-sighted view that ignores the many benefits of keeping your business due diligence-ready. Indeed, many situations arise during standard business operations that are easier and smoother when due diligence documents are dependable and within reach, which is why, on the flip side, leaving due diligence for a last-minute scramble can hurt your business.
Instead of procrastinating due diligence away, embrace it to become part of your company’s everyday business practices. Read on for our take on why due diligence should never be left at the bottom of your list.
What is due diligence?
Due diligence is the comprehensive evaluation or investigation of a business to establish a comprehensive and thorough understanding of its assets and liabilities.
When is due diligence needed?
Proper in-depth due diligence is primarily only needed in M&A situations, but it’s also relevant in other circumstances that arise more frequently than you might think. The four usual ones are:
- Minor and major tax or compliance audits, which can happen more often than you’d like to believe.
- Investment initiatives, which can bring external parties to examine your business very closely.
- Joint ventures, like entering into a new business partnership or even entering into an ad-hoc alliance, like launching a joint marketing campaign.
- Onboarding a new client or being onboarded as a new client, which are both situations where you and the other parties want to know that you’re hiring or being hired by a company that is reliable and above-board.
Even in an M&A situation, though, it’s worth it to have your due diligence ready well in advance. If your business is already due diligence-ready before any specific M&A opportunity reaches you, you’ll be in a stronger position for negotiations. It a) shows that you are organized, b) makes a good impression on the other party, and c) raises your business reputation.
What’s more, your readiness places you to be able to respond quickly if an M&A opportunity comes up, making you more likely to succeed in your proposition.
Being due diligence-ready means keeping corporate governance in hand
When you’ve got your corporate governance under control, it means that your organization has established rules and processes that control the way assets and operations are managed.
This includes issues like access to and storage of mission-critical business documents and balancing the interests of shareholders, customers, management, and employees. Corporate governance goes hand in hand with due diligence, so when you keep your eye on due diligence, you’ll inevitably also promote smart processes for dealing with corporate governance issues.
Here are four of the vital aspects of corporate governance that connect with due diligence:
1. Consistent compliance
Every company must have strong access controls for company data, as part of corporate governance to ensure that sensitive data remains confidential. These controls are a prerequisite for compliance with an immense number of legal and industry regulations.
In recent years, regulations have mushroomed across every industry, particularly relating to financial integrity and data privacy. What’s more, these regulations are being enforced ever more strongly by banks, government regulators, and independent committees. The astonishing boom of the governance, risk, and compliance (GRC) software market, which is set to hit $64.6 billion by 2025, emphasizes this point.
Corporate governance policies help maintain compliance with a range of regulations and form the backbone of your due diligence for a compliance regulation audit.
2. More efficient business
Your business runs more smoothly when all your employees, managers, and stakeholders can access the documents they need to do their job when they need them. A long delay while someone hunts for the right document in a mountain of papers or a slew of files, or waiting for the one person who can authorize access to return to their desk, holds up business unnecessarily.
With corporate governance policies regarding centralized document storage and streamlined access controls in place, you’ll be able to achieve due diligence at the drop of a hat.
What’s more, managing due diligence with a deal room (or investor deal room) empowers your team to have the right documents at their fingertips, to inform faster and better business decisions regarding mergers, acquisitions, entering business partnerships, and more. As a bonus, your employees won’t waste time trying to find the contract, document, or file they need to move forward with their projects. This is what corporate governance is all about and what corporate governance software helps you with.
3. Increased business reputation
Solid corporate governance policies mean that you are visibly due diligence-ready at all times, significantly raising your business reputation.
It’s clear to your associates, colleagues, partners, board members, investors, and other stakeholders that you know where to find your contracts, board meeting minutes, and financial and other documents at all times. You know who has access to them. You keep them up to date. You cultivate a legitimate impression that your business processes are streamlined and organized.
Unlike some other companies, yours isn’t thrown into a panic when someone requests a copy of their contract or your articles of incorporation. All of this places your business in a memorably flattering light.
4. Better business decision-making
Solid corporate governance practice means keeping your documents up to date, with all the obvious benefits that this entails.
When your company documents, contracts, and other digital assets are consistently updated via an intuitive repository, it saves you from losing money by referring to expired arrangements, enables you to make better business decisions that are based on the most recent information, and places your business solidly on relevant data.
Maintaining the most recent and fresh documents makes your due diligence more pertinent and more accurate.
Due diligence is a keystone habit
Instead of leaving due diligence for a last-minute scramble, think of it as a keystone habit for your businesses. When your company is due diligence ready all the time, not just in a pinch, you’ll keep your business documents streamlined and organized.
Your employees will know how to quickly find vital documents without wasting time in fruitless searches, your customers, clients, and shareholders will feel reassured that you control who has access to their most sensitive data, and you’ll always base business decisions on accurate information. Your business reputation rises, and your bottom line follows suit.
As a bonus, when a situation does come along that demands due diligence – like an M&A, an audit, or a joint venture – you’ll already be primed to act, making you well placed for the best possible result.