At this point, of course you are increasingly curious about what due diligence is, right? To reduce your curiosity, consider the following definition of due diligence:

Due diligence is the process of examining and developing the necessary level of understanding of four factors — the company and its business operations (in other words, its products, assets and/or services and how the company functions); determine the appropriate valuation of businesses, assets and transactions; and check management capabilities, key personnel, and employment matters — before transacting business with, investing in, licensing assets or services, or purchasing all or part of a business or its assets. The four business pillars that will be carefully investigated in a due diligence check are the company, its business operations, its business value and/or assets, and its people.

Due Diligence in Business Transactions, Anything?

After knowing what due diligence is, next you must be curious about when and what due diligence is done in business activities. Most entrepreneurs and investors recognize the importance of conducting due diligence in preparation for a purchase of securities or a corporate merger. The types of business transactions that are generally often subject to due diligence before proceeding to the transaction process are as follows:

• Loan transactions
• Purchasing a business or its assets
• Company purchases (either mergers or business purchases)
• Purchase of stock or investment in a company, such as with a private placement
• Purchase of real estate

Some Other Due Diligence Practices

In addition, there are several other business transactions where the need to conduct due diligence is actually as important as some of the transactions above, but can be ignored, as follows:

• Purchasing the rights to operate a franchise from the franchisor
• Starting a company with a partner or multiple partners
• License products, services, technology or intellectual property from third parties
• Licensing products, services, technology or intellectual property to third parties
• Participate in a joint venture
• Engaging third parties to design and/or develop a product, service or technology
• Engaging third parties to manufacture or provide products, services or technology
• Enter into various types of contracts that are important to your business

This list demonstrates that due diligence investigations are not limited to decisions about whether to buy or invest in a business or buy real estate; conversely, due diligence applies to prospective business transactions.

In addition, the process is not only to convince interested parties about the legal and financial aspects of the transaction; rather it is broader namely to provide an adequate level of comfort to interested parties with respect to the business foundation under investigation — the company; its products, services, assets and operations; the appropriate value of the company and/or its assets and potential transactions; and personnel essential to the success of a potential business relationship.

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