Due diligence you can trust

What is a Due Diligence Check?

The due diligence process involves thoroughly identifying, evaluating and verifying all available information on a person, company or entity. A due diligence check is especially important when you’re hiring or considering prospective business partners or new commercial relationships. By conducting a comprehensive due diligence process through a reliable source, you can be more informed and confident in your company dealings.

With corruption rife on an international scale, due diligence checking with a global reach is more important than ever. To protect themselves from liabilities and regulatory non-compliance and to ensure successful, legitimate business transactions, companies must make sure they have timely and accurate business intelligence.

What is the Purpose of Due Diligence?

Due diligence serves as a critical investigation tool employed by businesses and individuals before entering into an agreement or a transaction with another party. The primary objective of this process is to minimise potential risks and maximise the assurance of making an informed decision. It involves meticulously scrutinising every detail relevant to the transaction to ensure that no vital information is concealed or overlooked.

In business transactions, due diligence aids immensely in risk mitigation. It provides a thorough understanding of all possible liabilities and risks associated with the potential deal, enabling parties to plan for contingencies, set realistic expectations, and negotiate terms confidently. This comprehensive examination helps in identifying potential deal breakers, thus improving decision-making and making the transaction transparent and fair.

Due diligence also serves as an essential strategy to circumvent legal complications and financial losses. By revealing potential legal issues, hidden liabilities, or even irregularities in financial statements, it promotes compliance with relevant laws and regulations. This prevents potential legal disputes and financial pitfalls, shielding businesses from unnecessary risks.

Due diligence paves the way for informed decision-making in business transactions. It acts as a safety net, ensuring all aspects of a deal are meticulously examined and understood, thus facilitating a successful and smooth transaction.

Unpacking Due Diligence: Key Concepts & Components

Due diligence is a multifaceted concept encompassing several critical components that collectively form the foundation of this indispensable business practice. It is characterised by three primary pillars: risk assessment, factual verification, and comprehensive research.

Risk Assessment forms the backbone of due diligence. It involves evaluating potential risks linked with the transaction or partnership under consideration. This encompasses financial risks, such as unseen liabilities or revenue inconsistencies, operational risks, like inadequate management systems or outdated technologies, and reputational risks that might arise due to public relations or branding issues. By identifying these risks upfront, parties can create effective strategies to mitigate them, ensuring a successful transaction.

Factual Verification is another integral aspect of due diligence. It is a meticulous process of cross-checking all provided information to authenticate its accuracy. This includes confirming the truthfulness of financial data, examining legal documents, verifying the identity of parties, and more. Factual verification ensures that all decisions are based on factual and accurate data, fostering trust between parties.

Comprehensive Research is the broad umbrella under which risk assessment and factual verification fall. It involves thoroughly investigating all areas of a prospective deal - financial, legal, operational, and strategic. This includes scrutinising financial statements, understanding the business model, evaluating the competitive landscape, and analysing the company's culture and leadership. This in-depth exploration enables parties to gain a holistic view of the prospective deal, aiding in informed decision-making.

Together, these three components give due diligence its structure, equipping businesses with the insights they need to navigate complex transactions confidently and successfully.

Due Diligence Checklist

While some companies’ checklists are too narrow or too broad, our due diligence checklist is comprehensive enough not to omit anything important, while only including the diligence due - in short, what is necessary. Our checklist will help you target the level of third-party due diligence investigation required to mitigate risk.

To start with, you can ask:

• What countries am I doing business in, and where are my business contacts?
• Are foreign laws relevant to me?
• How much risk can be foreseen in doing business with the company in question?
• Are any politically exposed persons (PEPs) involved in the commercial relationship?
• Have I investigated any adverse reports about my potential business partner?
• Is the business or individual currently engaged in legal issues, or have they been in the past?
• Have I obtained information to confirm the true beneficial owners?
• What systems can I implement to thoroughly screen potential business partners?
• What information do I require on this third party, and where can I find it?
• What common external and internal threats do I need to consider, before entering into this relationship?
  
  

Due Diligence Source Checklist

For thorough due diligence checking, you will need to review information from a broad range of resources. In doing so, you will reduce your company’s risk of missing important information, or failing to satisfy the statutory compliance requirements. It’s also a good idea to consider: which due diligence process is right for you? Can you make do with free search engines, or should you be using paid online information services, specialist databases or the expertise of an outside adviser?

These sources can include:

Sanction Lists

Countries, entities and individuals against whom national or international sanctions have been imposed in connection to conflict, human rights abuses, terrorism or other serious offences.

Watch Lists

Third parties should also be screened against relevant law enforcement lists from Interpol, the U.S. Federal Bureau of Investigation (FBI), the UK National Crime Agency (NCA), and national or regional wanted lists issued by police forces in any countries connected to the business or individual in question. Such lists may relate to terrorist screening or crime.

Politically exposed persons (PEP) lists

PEPs pose a higher risk of exposure to bribery, corruption, money laundering practices or other economic offences on the basis of their influential positions, whether in government or in another organisation. If a potential customer or business partner is identified as a PEP, you must ensure effective risk management by means of an enhanced due diligence checklist.

Compliance related lists

Compliance related lists contain information about natural and legal persons against whom enforcement measures have been taken, such as a fine, restriction of commercial activities or exclusion.

Company profiles

A company profile contains information on the formal legal incorporation of the company in question: the company’s corporate structure, ownership relationships and control mechanisms, for example.

Summary of legal proceedings

You will find information in summaries of legal proceedings about legal actions in which the legal or natural person in question may have been involved.

News Reports

Current and archived news reports can play a useful part, for example, they can be used to check the reputation or official status of natural and legal persons. Regard news reports as being a supplement to traditional sources for due diligence investigation.

Types of Due Diligence Checks

There are a number of types of due diligence checks, depending on your industry.

Financial Industry

Financial due diligence involves reviewing and assessing an individual’s or entity’s financial information and fiscal performance. This involves looking into financial factors such as earnings, assets, liabilities, cashflow, debt and management. This type of due diligence not only looks at the organisation’s financial results historically, but also examines its forecast financial results and future prospects based on the existing business plan.

Operational

Operational due diligence looks at an organisation’s operations and assesses both the risks and the potential for the organisation’s value to appreciate. This type of due diligence aims to confirm whether the organisation’s business plan is feasible given the operations that are in place as well as planned capital expenditure. It also analyses prospects for gleaning more value from the organisation by improving operations and looks at operational risks as well.

Commercial

Commercial due diligence investigates the market position of an organisation’s products and services to determine its commercial appeal.

Market

Market due diligence entails gathering data from industry experts, competitors, customers, suppliers and other third parties to look at the current and future market situation of an organisation.

IT Industry

IT due diligence investigates a company’s IT environment to determine whether it’s efficient, cost-effective and secure and whether it can support the organisation’s growth.

Intellectual property

Intellectual capital due diligence examines and assesses an organisation’s intellectual capital – that is, its intangible assets. These assets include human capital, the value it derives from certain relationships, intellectual property and other structural capital. Basically, it’s looking at those attributes that differentiate one organisation from similar competitors.

Human capital

Human capital due diligence analyses and assesses an organisation’s human capital – that is, the economic value of its employees’ skills, education, knowledge, creativity, habits, personalities and other social attributes. The notion of human capital acknowledges that from employee to employee, labour is not equal and that UK organisations can invest in employees to improve their quality.

Illuminating Mergers & Acquisitions with Due Diligence

In the realm of mergers and acquisitions (M&A), due diligence takes centre stage. It is a key determinant that can significantly influence the success or failure of an M&A deal.

Primarily, due diligence aids in accurately assessing the value of a prospective acquisition or merger. By thoroughly examining the company's financial statements, asset valuations, revenue streams, and growth projections, it gives a clear picture of the company's financial health and potential profitability. This allows for accurate valuation and helps decide whether the deal is financially viable and strategically beneficial.

Due diligence is also crucial in identifying potential risks associated with the merger or acquisition. These risks could stem from various sources, including legal issues, operational inefficiencies, or reputational damage. By uncovering these risks ahead of time, parties can take preventive measures or negotiate the terms of the deal to account for these liabilities, ensuring they don't become stumbling blocks post-transaction.

Finally, due diligence ensures a fair and transparent deal. It guarantees that all parties involved are well-informed, and every aspect of the deal, including the challenges and opportunities, is disclosed and understood. It fosters trust and paves the way for a smoother transition.

Due Diligence Pitfalls to Avoid

Even with the best intentions, UK businesses can sometimes falter during due diligence checks. Here are some common pitfalls and how to avoid them:

1. Insufficient Time Allocation

Due diligence is a meticulous process that can't be rushed. Haste often leads to oversight, missing potential red flags. Avoid this by planning ahead and allotting sufficient time for a thorough investigation.

2. Neglecting Non-Financial Factors

While financial due diligence is crucial, ignoring non-financial aspects like company culture, human resources, or operational processes can be detrimental. Ensure a holistic approach by incorporating a thorough assessment of all company aspects.

3. Over-reliance on Documents

Documents provide a snapshot of the company's position, but they may not reveal the whole picture. Make sure to also conduct interviews with key stakeholders, suppliers, customers, and employees to gain diverse perspectives.

4. Lack of Expertise

Understanding legal, financial, and industry-specific intricacies often requires specialist knowledge. Collaborating with experts or advisory firms can provide deep insights and ensure a comprehensive due diligence process.

5. Ignoring Post-Acquisition Integration

Due diligence shouldn't stop at deal closure. Preparing for post-acquisition integration is equally vital. Develop an integration plan during the due diligence phase to ensure a seamless transition.

By being aware of these common pitfalls and taking proactive measures to avoid them, businesses can significantly enhance the effectiveness of their due diligence checks.

Due Diligence in a Changing World: Global Trends and Regulations

The landscape of due diligence is continually evolving, influenced by global trends and shifting regulations. One prominent trend is increased digitalisation. As many businesses embrace digital platforms and tools, due diligence is also adapting, leveraging technology to efficiently analyse large data sets, streamline processes, and enhance accuracy.

However, the digital shift also poses challenges like cybersecurity threats and data privacy concerns. As such, regulations surrounding digital data and security have tightened globally, impacting how due diligence is conducted. For example, GDPR in Europe has set rigorous standards for data privacy, mandating a thorough review of data management practices during due diligence.

The global spotlight on ESG (Environmental, Social, Governance) factors has also led to the rise of ESG due diligence, demanding careful assessment of a company's sustainability efforts and ethical governance.

The need for adaptability in due diligence has never been more evident. Firms like Nexis Solutions UK equip businesses with the tools and insights needed to adapt, ensuring robust, compliant, and forward-thinking due diligence checks in a rapidly changing world.

Looking for a Due Diligence Checklist?

A due diligence checklist is designed to take companies systematically through all the information required to investigate and assess potential threats.

Ultimately, a due diligence checklist can help companies:

• Better understand their customers, employees and vendors
• Protect the business from reputational, financial and regulatory issues
• Boost productivity
• Increase profitability
• Improve decision making

What Happens in the Enhanced Due Diligence Process?

There are five stages in the enhanced due diligence process:

1. Key information is provided by the prospect through a questionnaire—which is passed on to you either personally or through a third party.
2. For corporate entities: you will need to obtain official documents and contracts, as well as the company’s name, shareholders, beneficiaries, structure, associated PEPs, members of the board, and any other relevant records.
3. For individuals: the information required for review will depend on the nature of the proposed relationship.
4. For the most part, an individual will need to provide identity documents, records and sources of funds, and disclose any connection to politically exposed persons.
5. For prospective clients and third parties: you will need to cross check these entities against global sanction lists, as specified above.

Enhanced Due Diligence with LexisNexis®

LexisNexis offers powerful due diligence tools and a world leading collection of aggregated information on people, companies and countries. These solutions let you conduct enhanced global due diligence checks, take advantage of compliance monitoring services and screen individuals and companies around the world from one convenient source. Rather than going through the process of sourcing all the necessary information manually, we can take care of it all for you—all in one easy-to-use product.

Nexis Diligence+™

Nexis Diligence+ enables you to perform comprehensive research to investigate and monitor third parties, customers and other entities with whom you do business. This simple and intuitive tool also helps you gather all the regulatory data you need to ensure your ongoing compliance. The built-in report builder allows you to produce tailored time and date stamped reports, to demonstrate your ongoing compliance efforts if you undergo a regulatory audit.

With Nexis Diligence+™, you have access at your fingertips to:

• More than 150 premium business information databases
• Millions of public and private company profiles covering both developed and emerging markets
• Politically exposed person (PEP) lists, international sanctions lists and watchlists
• More than 26,000 current news sources from newspapers, blogs, and newswires, as well as an archive going back 40 years
• The LexisNexis® database of international court cases and decisions
• Risk analysis reports
• More than 500 biographical sources and executive profiles

With such comprehensive documents on the people and companies you target in this process, you can minimise threats and safeguard your business; increase your knowledge in critical business decisions; and most importantly, grow your business with confidence, conduct company searches.