Risk Factors to Consider in Due Diligence

The acquisition of a company via an acquisition or merger could be a big milestone for any company. It can also lead to serious issues. This includes legal liability in the form of financial losses, reputational damage and legal damage. Due diligence is a procedure which allows companies to carefully assess any new project.

Due diligence is a method which identifies risky factors. These risk factors are contingent on the nature and type of the business. For instance, a bank or financial institution might require a different degree of due diligence than an online store or retail company. In the same way, a business with an international presence may have to examine the laws specific to its country that affect its operations more than a local, domestic customer.

Businesses should be aware of the fact that customers may appear on sanctions lists. This is an essential examination that must be carried out before entering any contract into, particularly in cases where the customer has been found to have engaged in illegal activities such as bribery or fraud.

Other important aspects to take into consideration during a due diligence exercise include the dependence on specific person or entity. The dependence of a business on its owner-managers or key employees could be a red signal that could lead unexpected losses if an employee suddenly quits the company. The amount of shares owned by the top management is also a factor to consider. A high percentage of ownership is a positive sign, while low levels are a red flag indication.

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