Perspective

Due diligence is a commonly heard but little-understood term. It means assessing the value or credibility of an asset, business or counterparty before entering into binding contracts.

Unfortunately, it is often a mere box-ticking exercise and rarely gets to the heart of the issue. This is because the form easily prevails over the substance, meaning that agreeing on the protocols for access to data rooms, documents, and public records and then completing the agreed enquiries doesn't necessarily reveal the truth. In the same way that audits don't often uncover fraud, due diligence doesn't often uncover the actual state of a business or proposed transaction.

Lawyers and consulting firms have due diligence templates which are convenient and easy to roll out in one transaction after another, but may not suit your deal or help you make a fully informed decision to proceed or abandon.

Like an audit, completing the due diligence process may assure the participants that everything is going well even when it isn’t. The critical missing ingredient is often honest, direct communication with stakeholders such as current or former contractors, employees and other parties who have dealt with the business or its key persons. NDAs or other confidentiality obligations could constrain these people, but direct contact with them will be much more revealing than reviewing questionnaires.

Finally, never rely on the due diligence of another investor instead of making serious enquiries. There are many examples of significant corporations relying on the efforts of others only to find that the original work was shoddy and superficial.