A part of the financial investigation of a company – often associated with purchasing or investing in a company, due diligence is an important component of business transactions. At the due diligence stage, most companies require a non-disclosure agreement to protect both parties’ interests. Due diligence involves a thorough investigation of inventory, equipment and furniture and all assets held by the company. It will include a detailed review of prior year tax returns, financial statements and sales records, as well as all other sales records, debts, accounts receivable/payable, etc. Typically performed by a Certified Public Accountant, due diligence gives potential buyers a complete picture of the financial state of a company.
A selling company has to be careful to not disrupt the course of business, and a confidentiality agreement is one way to ensure that the daily operations continue as planned. By signing a non-disclosure, the potential buyer agrees to keep their investigation of the company quiet. This also allows the buyer to do a thorough vetting of the company’s paperwork to ensure that they know the facts and background of the company.
The amount of due diligence and the extensiveness of the investigation depends on several variables. The experience of the buyer to purchase companies, the size of the transaction, the buyer’s risk tolerance level all will help to determine how deep of an investigation needs to be made. There is no right or wrong amount of due diligence – and there is no guarantee that the information gathered will be a complete picture of the company. The process of due diligence simply gives the buyer or investor as much information as possible to make an informed decision. It is possible to have too much information, so care must be taken to request only the information that is needed to make the best decisions possible.