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Due Diligence and Background Check

Do You Need Due Diligence & Background Checks?

Whether your company is about to acquire a new company, enter a new market, or fill an important role, it’s important to have full knowledge of what you are getting into.

A business acquisition or merger is one of the most important investments any organisation can undertake. It can take your company to great heights or plunge it down to bankruptcy. That’s why these kinds of decisions must be made from an informed standpoint.

Due diligence helps you get an in-depth understanding of a company, a market, or a person you are about to engage with, so you can make decisions that add value with minimal risks.

What Is Due Diligence?

Due diligence is a profound review, audit, or investigation to fully understand a company or a person and confirm specific details under consideration. In a way, it’s an organisation acting with prudence by carefully analysing advantages, risks, and costs before making a deal.

When Do I Need to Perform a Due Diligence Check?

Due diligence is generally practised when participants have agreed to a deal in principle but have yet to sign a contract. It’s most crucial when making significant investments, such as acquisitions, mergers, and entering a new market. It should also be carefully conducted before purchasing a new property or equipment, filling a new position, or any other business engagement with another party.

What Is a Due Diligence Checklist?

A due diligence checklist refers to the process of analysing the companies involved in a transaction. It serves as a guide to gathering essential information, such as an organisation’s size, assets and liabilities, contracts, and more. Through this checklist, you can identify the benefits and potential issues you might encounter once you undertake an investment.

What Documents Do You Need for Due Diligence?

Standard due diligence often requires documents from these five categories: corporate, financial, legal, asset, and intellectual property.

Corporate Documents

These documents give us an overview of a company’s inner workings, such as how it’s structured, who the key persons are, and more. They can include:

  • Articles of incorporation
  • Directorships and Shareholding
  • Corporate bylaws and any amendments
  • Certificate of Good Standing
  • List of subsidiaries, partnerships and joint venture agreements
  • Reincorporation or restructuring documents
  • Business plan

Financial Documents

Financial documents provide evidence of your revenue, transactions, and other financial claims. They may include:

  • Annual and quarterly audited financial statements, with auditor’s reports
  • Latest interim financial information
  • Future financial projections
  • Descriptions of strategic plans
  • Budget plans
  • Schedule of accounts receivable and accounts payable
  • Records of depreciation and amortisation methods and changes in accounting methods over the past five years.
  • Copies of the general ledger
  • Copies of any debt financing documents
  • Copies of any equity financing documents
  • Lists of internal control procedures
  • Schedules of any deferred revenue

Legal Documents

Legal documents give insight into the legal entities that govern a business. They also review any legal matters that may affect the deal in the future. These can include:

  • Pending and settled litigation against and initiated by the company
  • All active litigation files
  • Any consent decrees, injunctions, settlements, judgments, and other orders
  • Any loan agreements, financing agreements, and credit lines
  • Copies of all contracts
  • Licensing agreements
  • Information on past and present governmental investigation
  • Legal counsel responses to audit inquiries and letters to auditors

Asset Documents

Asset documents record everything tangible a company owns, such as:

  • Lists of all owned or leased properties with descriptions
  • Data on all sales and purchases of major capital equipment
  • Equipment lease agreements
  • Real estate deeds, mortgages, appraisals, leases, use permits, title policies, and other documentation
  • Schedules of owned and leased fixed assets, with descriptions, dates acquired, locations, and values
  • Equipment appraisals
  • Inventory lists with descriptions, item numbers, dates acquired, units, and costs
  • Policies on inventory aging, valuation, and obsolescence, and any methodology changes

Intellectual Property Documents

All documents that offer proof of trademarks, copyrights, patents, and other forms of intellectual property. This can include:

  • All intellectual property registrations and pending applications
    • Patents and patent applications
    • Trademark registrations, trademark applications and trade names
    • Registered and unregistered copyrights
  • Historical title records
  • IP Claims by or against the company
  • IP-related agreements
  • Lists of active websites and social media accounts
  • All proprietary and customised software and IT systems
  • Proprietary know-how, trade secrets, technology and processes
  • IP protection and enforcement (i.e. confidentiality agreements)
  • All licensing revenue and expenses

What Is a Background Check?

A background check is a method used to gain insight and verify details about a person. It looks into and validates a person’s education, employment history, and even criminal records. A background check is typically a part of pre employment screening and assessment, especially when filling crucial roles in a company.

What Is Usually Checked In a Background Check?

Depending on the type of work or kind of investment a person will be involved in, a background or pre-employment check may include the following:

  • Criminal records, including arrests and convictions
  • Civil and Criminal History
  • Employment history
  • Bankruptcy Checks
  • Immigration Status
  • Work authorisation
  • Personal debt collection history
  • Education history
  • Social media presence
  • Credit history

Why Do I Need to Do Due Diligence or Background Checks?

Every good decision is based on good substantial evidence. No matter how impressive a deal or an individual is, it’s imprudent to take their word without first confirming the details. Due diligence and background checks validate what they offer and provide more insight into a company or person.

Since the availability of quality information helps make a more sound decision, deals that have gone through a due diligence process have higher chances of success. To expound more, due diligence allows you to achieve the following:

  • To get a realistic and more accurate estimate of the value of a deal
  • To verify the information presented by the other party during the investment process
  • To identify potential issues in an investment opportunity and avoid bad transactions
  • To ensure the investment opportunity and the parties involved comply with the deal criteria.

In the same way, background checks on applicants assure the following:

  • You employ the best-qualified person for the job.
  • You provide a safe workplace.
  • You encourage honesty in the application process.
  • You eliminate uncertainty in the hiring process.

Looking for a Due Diligence Service or to Get an Employment Background Check In Australia?

NSI Global Counter Intelligence provides expert due diligence and background checks on corporations or individuals in Australia and worldwide, including offshore companies. So don’t take the risk on bad investments. Call us now!

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