When entering into a new contract, “due diligence”may seem like two of the most daunting words in the English dictionary. Though it may sound intimidating to you now, due diligence can save you thousands later. Simply put, you cannot ignore it. At Smiley Law, we prepare clients for the unforeseen by helping you understand the basics of due diligence and what it means to your potential case.
The Law of Blind Dates: What is Due Diligence?
Due diligence sounds like a complex legal concept, but the truth is that today everyone conducts due diligence, especially when dating. It’s become almost cliché for people to “Facebook” or “Google” someone before going out on a date. The Internet affords all of us the ability to check the social media accounts of a potential romance even before agreeing to the date. By the time you are face-to-face, you each probably already know a great deal about one another.
Similarly, in contract law, you want to get to know the other party as much as possible before sitting down at the “table.” Think of the business transaction as the start of the relationship, where you should conduct enough research and analysis to make informed decisions that can save you time, money and “heartache” should problems arise in the future.
How to Conduct Due Diligence
In a general sense, due diligence is your initial background check. When it comes to specifics, it is a very individualized process that varies from person to person, transaction to transaction, and entity to entity. There is no right way to go about it, but there are some wrong ways. We always recommend that you contact an experienced attorney to help walk you through the due diligence process.
To start off with, here are three factors to always keep in mind as you conduct your due diligence:
- Accounting – Make sure to know the basic accounting figures of the person or entity on the other side of your contract. Find out the historical revenues, expenses, and profit margins that may be relevant to your future deal. Make sure to use several years worth of comparison to obtain the right picture of the economic stability of the other party.
- Management- Know how the business is managed. Good management often leads to good results. Poor management often leads to disastrous results. You do not want to find yourself stuck with managers you can’t work with in the future.
- Risks – Every deal comes with a risk of some sort. Risk isn’t always bad. In fact, risk can translate into profit down the road. Just make sure to know and be ready to accept the risk related to your deal.
If the accounting, management, and risks of your potential deal align with your comfort level, you may be on the right road. There are, however, many other factors to keep in mind. Competitors, capitalization, and even exceptions are just a few of the other factors that can come back to bite you in the future. Having the right legal team behind you can make all the difference. The attorneys at Smiley Law have years of experience in helping clients get the knowledge they need for their deal succeed. Contact us today for any of your due diligence questions.