Due diligence is when you actively review, investigate, and collect information about a business’ assets, debt and its overall standing to justify your investment decision. By using those facts, numbers, and information that you learn, you are able to better grasp the reality and whereabouts of it in terms of risks and potential for returns. So, before you think of investing in another business, we suggest you 10 simple steps for proper due diligence: 

due diligence

1.Look at the overall outlook of the business

First thing first, you must look at the overalls of the business you plan to invest or partner with. To get the overview, learn about its market valuation, registered capital, its products and services, including the number of employees it has, for example. Knowing this information lends you a clearer picture to the real nature of this business. 

2.Learn about its revenue and profit and loss tendency 

Then, you can start to look further in more detail to the business’ financial status, by understanding what kind of revenue it has coming in, and how much is left as profits and losses. If you can look into informative numbers, such as a business’ net profit from the past two years, that can also allow you to identify growth records and the potential of that business as well. 

3.Check on its industrial competitors

When you have clearly understood the capital, due diligence revenue, and profits and losses of the business, look at the bigger view towards its current industrial peers and competitors. You might try and compare the business with at least two or three similar businesses out there, using its figures as baselines for this analysis. By doing this, you can better see the pattern of its growth when put into necessary context. 

4.Assess its performances and values

Carefully interpret various performance ratios which reflect the health of business, such as Price to Earning, Price to Growth, Earning to Growth, etc. Scrutinize these ratios for the business you wish to invest, and also for its competitors. You might as well look at several aspects such as its debt, equity, annual income, balance sheet, and other vital parameters you deem must-know’s. 

5.Be aware of the management style and the ownership structure

In due diligence, you must be able to answer yourself about the business’ management and ownership. Throughout its period of operation, has it been managed and run mostly by the founder(s)? Have the board members changed? These information can explain the growth path and indicate the future direction of the business. 

6.Read into its balance sheet

This might sound like a simple thing to do, and it is. But let us not forget that the goal of reading into any business’ assets and debts is because we want to get the idea of the inflows of cash, and debts the business has at the moment, so we can be sure it’s got capabilities to pay off the obligations in the long run. 

7.Review its shares price history

You can try to study the movement and fluctuations of the business’ share prices both in the short term and long term, from past to present, to analyze and identify the risks present and natural to the business. 

8.Consider other pathways in the investment

Due diligence does not only serve you in buying a company’s shares, but it is also a tool that opens you up to other realistic possibilities of investment paths worth taking as well. In-depth information and prospective outlooks are helpful when it comes to determining which path you should participate in.  

9.Be mindful of its future outlook and expectations

Based on all information, you can also start hypothesizing and  prospecting the short-term revenue trend of the business over the next 2 or 3 years, as well as the long-term trends and its potential impact on the industry; for example, in terms of potential joint ventures and new product development in the future.

10.Risk evaluation 

Finally, assess all the internal due diligence and external risks involved in this investment decision. Try not to overlook external situations that can potentially impact the business in question, such as the bear and bull markets, political shifts, epidemics, popular trends, environmental situation, and even changes in law and regulations. 

due diligence

These 10 things are what you can do during your due diligence, and for better clarity and analyses, you can always consider hiring an all-in-one consultancy service to help you throughout the process!

Learn more about our Due Diligence Service