Question

What exactly is due diligence? How does it apply to acquisitions? How do we know that we have done our due diligence?

Answer 1

Solution. The practice of due diligence is to ensure financial records and agreements are in alignment provided by the other party with which the individual decides to join or invest. This system facilitates in decision making and provides with true picture of the other party, to ignore fraud or loss in future. It encompasses all the factors of organization's or other party's investment value, profit margin, market competition and fluctuations, examination of balance sheet, etcetera to evaluate performance and reliability.

In time of acquisitions, due diligence is done to attain fair value of deal prevailing in the market, other party's company reasons of selling the same and statements/records overview, any patent rights, legal factors encircling the same(if any), expected production capabilities and strategies employed. All this factors helps investor in achieving true picture of other party's performance of activities and reduces chances of unfavorable results in near future. It facilitates in building trust relationship between the two parties during acquisitions by alignment of information and ascertainment of potential defects in the deal.

Due diligence work provides with the investor or individual, information about data and records of other party with reliability and not just with the documents provided by the other party by collecting, recording, analyzing and interpreting the results thereby obtained by the auditor.