A company’s acquisition through merger or sale can be a big milestone for any business. It can also lead to serious issues. Legal liabilities, financial losses and reputational damage are all possible. Due diligence is a procedure that allows businesses to thoroughly assess any new venture.

Due diligence is a procedure that determines risk factors. These risk factors are based on the type and nature of the business. A financial institution or bank, for example, may require a greater amount of due diligence than retailers or ecommerce businesses. A business that has a global presence might need to review country-specific laws that impact its operations more than a single domestic customer.

One of the most important risk factors companies must be aware of is whether the customer appears on sanctions lists. This is a critical test that should be conducted before any contract is signed into, particularly in cases where the customer has been identified as having engaged in illicit activities such as bribery, or fraud.

When conducting due diligence it is essential to consider the extent of dependence on specific individuals or entities. A company’s dependence on its owners-managers or key employees can be a red signal that could lead unexpected losses if the employee is suddenly dismissed from the company. The amount of shares owned by senior management is also a factor to consider. A high percentage is positive, while a low level is a red flag.

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