Due diligence is a term widely used in the business world. It’s requirement as a normal activity in business has spurred the need for due diligence data rooms. In this article we are going to talk about what due diligence is, when does it happen, it’s history and how technology has influenced the process.
What Is Due Diligence?
Due diligence is defined as “an investigation of a business or person prior to signing a contract, or an act with a certain standard of care. It can be a legal obligation, but the term will more commonly apply to voluntary investigations.” That process of investigation practically happens in each and every M&A scenario and often happens at various stage of any business’s life cycle.
How Does Due Diligence Add Value?
The process of evaluating the costs, benefits and risks associated with the decision you are considering allows the decision makers to take an informed decision which wouldn’t have been possible had due diligence not been carried out. It is the difference between taking a risk and a calculated risk. Due diligence makes informed decision making possible.
When Is Due Diligence Carried Out?
Corporate finance as an industry exists around due diligence activities. This is why most mergers and acquisitions start and end around the due diligence process. Hedge funds, commercial property and even philanthropic foundations go through due diligence when audits are being carried out to get a snapshot of the business, evaluate the risk factors or consider valuations. The types of audit range from macro-economic to production and management with outside professionals usually hired for short term periods to aid in the process.
The Role Of Virtual Data Rooms In The Due Diligence Process
Being involved in due diligence of any kind usually means that you are given access to highly confidential information that the disclosing company intends to protect at any cost. The best way that companies protected their information was to not allow it to leave its premises, only showing them in rooms setup specifically for the purpose of disclosure to outside parties. If the companies interested to see this information lived in different regions, they had to travel long distances. If more than one company was interested then the same process would repeat. The cost and inconvenience of this physical process was high! Technology made due diligence data rooms more secure, affordable and convenient. It has also made the process from the start to the end quicker.
The due diligence is a fundamental component of any corporate finance transaction and due diligence data rooms have become a key tool for any due diligence process. What earlier use to happen physically is now happening electronically. What use to be an inefficient and expensive process, now happens more securely, more cost effectively and more efficiently. It is very likely that you will encounter a due diligence virtual data room at one point or another during your business life.
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