Irrespective of the type and nature, financial decisions invariably bring a significant amount of risk along with it. For the people who have invested a large sum of money, it is only fair to get an idea regarding the level and the impact of the risk involved on their investments.
Investors’ due diligence, in simple words, is an investigation procedure of company verification that provides you with enough information to reduce the risk of making an uninformed decision and assess the investment’s core components appropriately.
Purpose of Investor Due Diligence Process
The larger purpose of the investment due diligence process is to confirm the investor’s initial understanding of the investment opportunity.
Such a form of due diligence also helps substantiate the critical assumptions made by an investor in valuing the opportunity and identifying risks/uncertainties not captured in the initial assessment.
Types of Investment Due Diligence
A typical due diligence process can be of the following types:
Legal due diligence
Covers a broad scope of legal matters, including contractual obligations, ownership of assets, compliance requirements, and litigation. This type of due diligence seeks to confirm the validity of the rights being acquired by the investor, including the assessment of legal risks which could undermine the value of the investment.
Commercial due diligence
Covers the market share and positioning of the target business’s market, including drivers and prospects. This type of due diligence seeks to obtain an independent perspective on the sales numbers as the most crucial component of the target’s business plan.
Financial due diligence
Covers a wider perspective as it seeks:
- Validation of the investor’s valuation assumptions by looking at historical performance and check if it is consistent with projections
- Identification of various financial uncertainties and exposures which could lead to additional costs to the investor.
Among the other types of investment due diligence include tax, environmental, technical, and regulatory due diligence, performed as and when the impact of these areas on the business is significant.If need more information or help in accounts payable automation get help of Accountants Rochdale.
How Does the Company Verification Process for Investor Due Diligence Work?
The process of investor due diligence works as outlined below:
- Requesting and receiving the information
- The due diligence team then visits the site at the target business
- Conducts interviews with management and holds internal communication and discussion of findings
- Preparation of investment due diligence reports
- In the next step, investors scan the reports of the different workstreams and consider the implications of the results for investment valuation
- The investors then put across the investment due diligence findings to negotiate the changes or additions to the terms of the transaction
Investment Due Diligence Questionnaire
Among the common questions that the investors may ask during the due diligence process include:
- How is the business positioned against various competitive threats?
- Who are the users of the product?
- How is the competition, and are the customers, suppliers and competition fragmented?
- What are the key drivers that are fuelling the business growth?
- What are the specific regulations that govern this market space?
- Are there any barriers to entry?
- How is the distribution channel, and who controls it?
- Are there any market boundaries?
Investment due diligence is a critical process for any business to investigate who they are dealing with. Businesses are required to perform due diligence before onboarding customers and before they enter into a contract with other companies.
However, with tightening regulations and compliance being a top priority for businesses, many companies find it more feasible to get professionals such as AuthBridge for due diligence and company verification. It not only eases the process but also frees up their resources for other core business activities.