The Impact of Due Diligence: When It Shines and When It Fails

Due diligence is often likened to the crown jewel of a business negotiation or corporate acquisition. It is the meticulous investigation into a company or asset's health, financials, legal standing, and more. However, can due diligence simply be bad, or is it always a beneficial process?

Due Diligence: A Path to Prosperity

Contrary to popular belief, due diligence is rarely, if ever, a negative endeavor. In fact, it is a critical component in the success of any business deal or acquisition. The legend of the successful entrepreneur who emphasized the value of thorough due diligence stands as a testament to this.

While there are instances where a rushed or inadequate due diligence process can lead to headaches and unforeseen issues, the overwhelming majority of cases highlight how due diligence can benefit both parties involved. For instance, in many situations, due diligence serves as a proactive measure, uncovering potential problems early on before they become irreparable. This can prevent future disputes and ensure smoother business operations.

The Case Against Due Diligence

One might argue that due diligence could be bad, especially when it leads to doubt. However, it is crucial to distinguish between necessary diligence and excessive scrutiny. Excessive due diligence can create unnecessary doubt and stress, causing more harm than good. The question then arises: is the diligence causing negative impacts or is it a normal part of the process?

Just like any process, due diligence has its downsides. Missed due diligence can lead to significant surprises such as intellectual property (IP) issues, unexpected litigation, failed markets, partnership conflicts, or even hidden equity. For example, a company might claim to have a large number of products sold, only to discover in due diligence that the products were sold at deeply discounted prices, making them unprofitable.

Essential Tools in the Due Diligence Arsenal

My personal approach to due diligence involves a comprehensive list of over 300 points of examination. This list serves as a critical tool for understanding the true nature of a company and its potential challenges. Unlike a "gotcha" game, the goal is to gather as much information as possible to provide the best guidance moving forward.

Due diligence can highlight weaknesses in management, flawed products, or even exaggerated claims about future potential. By uncovering these issues early, we can address them effectively and mitigate risks. For example, if a company has a management team with significant skill gaps, this can be identified and steps can be taken to address them.

Experiencing the Antidote: Lessons From Due Diligence

One of the key benefits of due diligence is that it can help identify and address potential issues on both sides of a deal. For the party conducting the due diligence, it can expose problems that need to be addressed. For the company being due diligenced, it can provide an opportunity to be transparent and honest about their current state.

For those subjected to due diligence, it is crucial to avoid covering up anything and to be straightforward about the company's current situation. Exaggerating the status of the company can lead to legal issues, which could be detrimental in the long run. Honesty is the best policy, as it builds trust and can prevent potential conflicts.

Conclusion

In summary, due diligence is not a process that can be inherently bad. When executed properly, it serves as a valuable tool for understanding the true nature of a business and its potential. It can prevent costly mistakes and ensure a smoother, more successful business transaction. Whether you are conducting due diligence or being due diligenced, it is essential to approach the process with honesty, thoroughness, and a willingness to learn.