Why Due Diligence Makes For A Sound Investment

Why Due Diligence Makes For A Sound Investment

Whenever we decide to open our wallets – whether to a buy a new washing machine or invest in a new car – we want to ensure we are getting a good deal and take time to weigh up the pros and cons.

When contemplating a joint venture, merger or acquisition, it is even more important to have all the bases covered and avoid finding skeletons in the corporate cupboard!

This is where “due diligence” comes in…The term itself inspires confidence, highlighting a rigorous and in-depth process of investigation of the potential risks involved in any deal.

An investigation of this type requires detailed examination of relevant technical, legal and financial management issues.

The credibility of major shareholders and the business acumen of key managers in the company concerned also become part and parcel of the study.

So it’s essential to hire a good law firm as well as good accountants!

Due diligence can be a laborious process but it is probably the most critical stage of investing.

It is a complete examination and evaluation of the investment situation and money, as well as reputations, can be won or lost if the process is ignored.


If you are entering into due diligence, you should feel from what you already know about the business that its market share, products/services and balance sheet are attractive.

Due diligence usually starts after a letter of intent is exchanged between buyer and seller following a successful bid proposal and prior to the signing of a contract.

So what does the process entail? The main elements are:
• Background checks on the management team involved
• Legal checks on the status of the company
• Accounting checks on the finances presented
• Factual checks on the statistics or figures given
• Relationship checks (both internally and with clients)
• Checks on company’s systems

Research varies depending on the source, but anywhere between 50 and 85 percent of all mergers are unsuccessful. Failed due diligence is often a reason.


Spanish assets are back on the agenda for venture capital firms with deep pockets.

Some of these investors are focusing on small companies or start-ups in need of external financing to grow their business.

Due diligence is a sine qua non for these funds looking for a juicy return on investment. They may be seduced by their target firm’s business model, but they want to ensure they are not leaving themselves open to patent infringement litigation, employee disputes, or tax scandals.

For more information on the due diligence process, contact Argali Abogados.


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