Okay, entrepreneur. Time to get real. Whether you’re the one checking out a company, or the company being checked out, you’re going to need to make sure that you’re able to conduct thorough, reliable due diligence to make sure you don’t get yourself into hot waters.
Whether you’re considering a potential business partnership, investment opportunity, or hiring a new supplier, understanding a company’s history, financial health, and reputation is crucial. So in this blog post, we’re going to teach you the key steps and best practices you need to confidently assess a company’s viability and mitigate any potential risks.
From analysing financial statements to scrutinising legal documents, vetting key stakeholders and conducting background checks, we’ll take a deep dive into both the traditional and modern methods of due diligence. We’ll also explore the role of technology and data analytics in uncovering valuable insights that can help you make well-informed business decisions.
So whether you’re a seasoned investor looking for your next investment, a business owner thinking about taking on a new supplier, or simply someone keen to protect your interest, this ultimate guide to due diligence will make sure you know how to avoid costly mistakes. Here’s what you need to do!
What is due diligence?
Due diligence is the process of conducting a comprehensive investigation and analysis of a company to assess its overall health, risks, and potential for success. This might include things like performing a credit check on companies, verifying claims about the products and services offered, conducting a check on companies’ directors – essentially, it’s the process of understanding the company’s operations, financials, and legal obligations.
Why do I need to do due diligence on a company?
Due diligence is a crucial process that will help you ensure that you’ve thoroughly examined all aspects of a company before you make any important business decisions. It’s intended to stop you partnering with or investing in a company that could later cause you a lot of financial, regulatory or reputational problems.
By understanding a company’s background, financial stability and reputation, you can assess the potential risks and rewards associated with any business transaction. You’re able to identify any red flags or hidden issues that may pose a threat to your investment or partnership, including potential legal, financial, or operational risks that may not be immediately apparent.
A commitment to due diligence can also allow you to build trust and credibility with your business partners, investors, or stakeholders. By showing that you’ve taken the time to thoroughly investigate the company you’re bringing to them, you demonstrate a commitment to transparency and responsible decision-making. And that’s always good!
7 Due Diligence Best Practices
Okay, we’ve defined due diligence and why it’s important – so how do you perform checks on companies? Here’s a step-by-step guide to what you need to do.
1. Define your objectives
Like with all detailed processes, you need to draw up a clear plan of action before you dive in. Start by identifying what it is you’re looking to accomplish with this process. Consider what factors are most important to you, whether it’s financial stability, legal compliance, or reputation. This will help to shape what information you need to gather, and the angle you need to take when you check companies’ details.
2. Conduct a comprehensive review of financial statements
Let’s be honest, the first thing on people’s minds is usually the money side of things. So when you’re looking into a company, there are a few financial checks you’re going to need to complete. You can use Companies House ‘check company by registration number’ tool to get immediate access to a company’s accounts, including their annual returns. This allows you to see their profit and loss statements, along with their shareholders’ funds. If you’re in partnership talks with a company, you can also request to see their balance sheets, income statements, and cash flow statements.
Your goal here is to assess profitability, liquidity, leverage, and growth trends, so that you can get a good idea of what will happen to any money you invest, and what your returns might be. It will also help you to assess whether this is a good company to partner with – will they be stable and lucrative? Or risky and unpredictable?
Make sure you look at a number of years’ financial information for the company you’re assessing. This will allow you to identify any anomalies or inconsistencies and identify patterns, building a detailed picture of the company’s financial history.
3. Scrutinise legal and contractual documents
There’s no denying that bureaucratic paperwork is boring. But it’s really important that you read through as many legal and contractual documents as you can in close detail when you’re performing legal checks on a company. Make sure that you know contracts, agreements, licenses and permits the business that you’re considering is legally obliged to have in place, and check that they do. Because the second you partner with them, you’re going to become implicated if they’re not adhering to regulations. Pay close attention to terms and conditions, termination clauses, intellectual property rights, and any potential liabilities.
When it comes to how to check company information to find these details, you might need to seek legal advice to make sure that you’ve requested, analysed and approved everything you need to make sure that this is a smart business move. And though seeking legal advice can be costly, it will be worth it to avoid expensive issues later down the line!
4. Vet key stakeholders
Key stakeholders in a company include executives, board members and major shareholders. And this is where you’re going to need to do some pretty hefty background checks. A really great way to check company legitimacy is to ensure the integrity and credibility of key shareholders. Look for any conflicts of interest, past legal issues, or questionable business practices that could impact the company’s operations or decision-making.
If you partner with or invest in a company, these key stakeholders are people you’re going to be working with closely as you steer your business forward. So make sure they’re legit, and make sure you like the way that they conduct their affairs. It’s important that you share the same values to ensure a smooth working relationship.
5. Assess industry and market dynamics
It’s no good looking at a company in isolation. All businesses operate within a broad and varied industry that comes with ever-changing market conditions. As you check UK company details, make sure you consider factors such as competition, regulatory environment, technological advancements, and market trends. All of these factors will impact a company’s growth prospects and sustainability.
If you’re struggling to understand these factors on your own, it’s worth turning to an industry expert. Being part of a community like Impact Brixton can help you to tap into a network of professionals who can help you build a picture of an industry – or point you in the direction of someone who has the knowledge you need!
6. Leverage technology and data analytics
If you’re reading this blog post and despairing about the time and effort that doing your due diligence on a company is going to take you, rest assured. In today’s digital age, technology and data analytics can play a crucial role in conducting due diligence, saving you time and money in the process.
There’s a ton of online databases, industry-specific software, and data analytics tools that you can use to analyse information efficiently – starting with an excel spreadsheet and scaling right up to Xapien. Tech can be intimidating, but it’s worth taking the time to master even a simple data crunching tool to help you with your research. These resources can provide valuable insights and help identify patterns or trends that may not be apparent through manual analysis alone. So it’ll definitely pay off in the long run!
7. Seek third-party opinions and references
Throughout this process of company checks, it’s absolutely crucial that you don’t rely on information provided by the company alone. Think about your last job interview. When they asked if you had any hobbies, did you answer “lounging blissfully in bed watching Netflix and eating an entire box of Chocolate Fingers”? Hats off to you if you did, but we’re guessing not.
A company is always going to put their best foot forward when you start digging around in their affairs. So the best thing you can do is seek third-party opinions and references to gain an unbiased perspective. Who else has worked with this company? Did they enjoy working with them? Did they benefit from their partnership? These are all questions that many companies will be happy to answer for you. So take the time to ask customers, suppliers, industry experts – you could even hire some external consultants to conduct independent assessments. Their insights can provide valuable validation or raise red flags that may have been overlooked. It’s always good to get a second option!
Conclusion: The Value of Thorough Due Diligence in Business Decision-Making
In today’s complex business landscape, conducting thorough due diligence on companies is essential for making informed decisions and mitigating risks. By carefully analysing financial statements, scrutinising legal documents, vetting key stakeholders, and leveraging technology, you can build a solid understanding of a company’s history, financial health, reputation, and industry dynamics. These valuable insights will help you avoid jumping into business with a company that might later bring you a lot of issues.
Remember, though – conducting company checks for due diligence is not a one-time gig. You have to stay vigilant, keeping an up-to-date analysis of the companies you work with to allow you to adapt to changing circumstances. It’s always better to be one step ahead than playing catch up!
If you’re looking for more details on the red flags you should be looking for when conducting your due diligence, check out our blog post – coming soon!
