Digital Due Diligence is the process of analysing the setup and performance of business operations. Investigations should include a breakdown of all human, software, and hardware factors. Where a comprehensive analysis of goals and marketing strategies reveals areas of weakness (i.e., efforts that do not support the business model), data-driven changes can be implemented.
If you are considering a new business venture, such as a merger or acquisition, you may benefit from a deeper understanding of what digital due diligence can do for you.
Importance of Digital Due Diligence for New Business Ventures
Digital Due Diligence aims to minimise and remove all issues associated with ‘bought as seen’ business ventures. Decision-makers working on behalf of a company and entrepreneurial leaders do not want any surprises following the completion of a deal to merge with or take over a business. Due diligence ensures all relevant facts are known.
For example, if you were to purchase a smaller competitor to absorb a wider market share, but if you did not carry out a thorough examination of the company’s debt, you could find yourself taking on a greater task than anticipated. Likewise, mergers with companies that require a significant investment in technology may prove undesirable under scrutiny.
When is Digital Due Diligence Required?
Whether you are still planning your business venture or whether your merger or acquisition is already underway, digital due diligence can help steer the critical choices that lay ahead.
Typical examples of when you may require digital due diligence include:
- Merger or partnership
- Entering major contracts
- Acquisition (buying a business)
The important thing to remember is that you should not attempt to complete a full analysis of all business operations on your own if you are not familiar with the process.
To highlight the in-depth nature of due diligence, we will next explore an overview of the analytical investigations before moving on to more granular examples.
Overview of Due Diligence for New Business Ventures
The due diligence process is necessarily time-consuming and complex. Requests must be made for access to all relevant business records (please see the next section for examples).
Next, insights from those initial investigations may reveal the need for further scrutiny of hidden records (you may like to think of this as “the details will come out in the wash”).
Sometimes, no misdirection is intended. Merely that the company does not realise the kinds of records that may be relevant. This is where expert knowledge of digital due diligence can help to uncover details of a business venture that may not be obvious to the untrained eye.
As part of the confidentiality agreement signed with the other company, no contact may be made with third-party sources during the course of the diligence investigations, as outside contact could reveal an early indication that a takeover is in the midst. Instead, due diligence must be carried out using the available in-house information – meaning a deep understanding of how to thoroughly investigate a company from the ground up is needed.
Business Venture Due Diligence Checklist
The following list gives a solid understanding of the investigations required to complete the business venture due diligence process.
Depending on the nature of the merger, acquisition, or takeover, more emphasis may be required in different areas of the analysis (a bespoke approach to due diligence ensures that the most appropriate investigations are completed and reported).
Legal due diligence
Legal due diligence is an essential step in uncovering any potential legal risk involved in undertaking a business venture.
Examples of legal due diligence include:
- Employee contracts
- Leasing arrangements
- Trademarks & copyright
- Business documents (e.g., registration)
- Outsourced agreements (e.g., contractors)
- Vendor contracts (i.e., sales / purchase / distribution agreements)
Financial due diligence
Financial due diligence is the essential accounting branch of the investigations into a merger, acquisition, or take over.
Financial due diligence includes:
- Tax details
- Pricing policy
- Quarterly / annual projections
- Bank statements & balance sheets
- Current debts (& repayment terms)
- Summary of investors & shareholders
- Complete business inventory (& valuation)
- Gross profit and rates of return review (by product)
- Real estate and business equipment review (& valuation)
Operational due diligence
Operational due diligence is necessary in order to understand how the current business model interacts with market trends.
Examples of operational due diligence include:
- Estimate current market share
- Understand typical industry profit margins
- Calculate the ROI of marketing campaigns
- Uncover current revenue streams linked to products or services
- Review effectiveness of all current and previous marketing tactics
- Identify demographic buying patterns (first-time buyers vs repeat buyers)
- Broad market analysis (establish the main competitors & industry trends)
Human resources due diligence
Human resources due diligence can uncover any gaps over oversights in staffing requirements that could adversely affect overall business performance.
Examples of human resources due diligence include:
- Request a list of employees
- Collate employee details (position / salary / skills)
- Ask for details on sickness and annual leave policies
- Compare salary scales to regional and national industry standards
- Acquire the current estimate of staffing needs (for later comparison)
Expert Support from the Digital Due Diligence Specialists
If you feel that your business venture would benefit from due diligence, get in touch today for your FREE initial consultation. It costs nothing to discover how digital due diligence could help you to navigate your business venture with greater confidence and direction – ultimately saving you time and money in the process.