Due Diligence: when, how and why

What is Due Diligence

Due diligence means all of the preventive checks that it seems appropriate to carry out before entering into a relationship with an individual or legal entity.

This category includes business partnerships, mergers, capital investments and any kind of commercial relationship with third parties.

Due diligence thus includes checks on the financial stability and reputation of a subject (individual or legal entity), indicating possible critical points or red flags and enabling the client to have a detailed picture in order to make a carefully considered decision.

Included with this type of investigation are FCPA Due Diligence and Anti-Bribery Due Diligence, to assist in compliance with U.S. and U.K. laws.

Why is it useful?

Easy deals and rarely if ever economically advantageous. Being skeptical about appearances and delving deeply into the reality of your counterparty is always a good way to avoid mistakes.
In order to know a person, especially a partner in a business deal, it’s necessary to have in-depth knowledge of capabilities, financial stability, and reputation. This is the only way to reduce the risk of becoming involved in deals that could be harmful economically and professionally.
Above and beyond strictly economic factors, a key point for having peace of mind in an investment is clear terms and conditions. It is vitally important to know the true history of the company in which you are investing, the changes it has gone through, possible problems it may have faced over the years, and changes of management.
Some sectors are particularly notorious for attracting huge investments that later turn out to be bad deals while other – undervalued – areas can yield unexpected results. In both cases, the principle of prudence, combined with careful analysis before the deal, enables you to make decisions with a broad and impartial perspective.
If it were standard practice to carry out a due diligence investigation before entering into a professional relationship with a third party, potential risks would be greatly reduced. A favorable due diligence makes it possible to enter into a business deal with fewer worries while an unfavorable findings gives you a clear idea of the risks related to the deal.
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