The ABC’s of Due Diligence Investigations


The world of business is so complex that no single phenomenon remains unchanged for a long time. As you gain momentum, you need to keep on innovating—or you get left behind. We all witness milestones from big companies such as joint ventures, mergers and acquisitions, financings and other major investments. How do these businesses thrive? How do they satisfy the dynamics of the competition?

One key standard by which companies follow before a major investment is due diligence investigation. This is the process of researching and analyzing an individual or organization before a business transaction. This helps in assessing the practicality and profitability of a transaction or investment.


Do I need a a due diligence investigation?

Assess yourself. Do you run a business? Are you stockholder of a big corporation? Are you about to accept a top-ranking position? Do you plan to enter a joint venture? All these entail due diligence investigations to give you a clearer picture of the company you are about to do business with.

The concept of due diligence is simple: it revolves around reasonable care or “required carefulness”. In simple terms, due diligence is studying for a major exam. In business, due diligence investigation is done in preparation for a major transaction.


How can a due diligence investigation benefit my business?

The goal of due diligence investigation is to provide you with information, hidden or otherwise, to help you make an informed decision. Would you enter a battlefield unprepared? Certainly not.

By conducting a due diligence investigation, you can figure out what a company is going through. It is typical for the larger business to conduct this due to their large assets. If there is even just a small risk of failure, wouldn’t you want to discover it? A due diligence investigation does just that—because once problems start, they become difficult to fix. Even in business, prevention is a lot better than damage-control.

However, due diligence is not limited to investigate hidden information or analyze risks. It can also determine opportunities when the acquisition or venture starts. If it’s for the betterment of both parties, why not? Let’s say, for instance, the potential partner has a strong chance of winning bids in future contracts—your business can definitely benefit from this strength.

Remember that both risk and opportunity are two sides of the same coin—but you don’t have to flip it. Running a due diligence investigation can identify the risks and opportunities that will help you arrive at the best decision.


What is the basis of due diligence investigations?

Due diligence investigation did not become a practice if it weren’t for the laws that emphasize on checking companies out of prudent and careful practice.

The use of due diligence rose due to the US Securities Act of 1933, originally referring to the process as “reasonable investigation”. Though every country practices their own laws and policies, here are the most common legal bases for investigative due diligence:

US Foreign Corrupt Practices Act

One strategy of the FCPA compliance program done by corporations is to tap into due diligence providers. They perform this as a precautionary yet sincere measure by identifying public officials associated with foreign companies.

US Patriot Act

The Act orders all financial institutions in the US to conduct due diligence in accounts established or maintained for foreign individuals or institutions. This is done as a means to combat money laundering.

UK Bribery Act

When the Act was still in the works, the Secretary of State published a Guidance outlining six principles followed in business. One of the principles, as stated in the Guidance, is due diligence, which is done in compliance with a code of conduct.

Non-compliance to these laws results in serious legal ramifications, ultimately damaging the reputation of the affected companies. Due diligence investigations are almost always called for in states, cities or areas where corruption is rampant.

How is a due diligence investigation conducted?

The due diligence investigation is an exploratory process and uses different styles to gather information. It encompasses person background checks, company background checks, mystery shopping, surveillance, and financial investigations.

The typical areas an investigator looks into are:

Company history and overview
Who founded the company? What is the vision-mission?


What benefits does the company offer to their employees? What is the dynamics of their workforce? Is there an existing association or union of their employees?

Financial record

How much is the monthly revenue of the company? Do they have a good credit history?


How does the company fare in marketing audits? Do they routinely perform IT audits?

Inventory management

What approach does the company use to manage their materials? How do they deal with issues concerning inventory?

Depending on the depth of the search, due diligence investigators can dig deeper. They can review public records, contact foreign offices and talk to actual individuals like customers to gather more information.

It is possible to perform a due diligence investigation on your own, but it might not be very effective. Investigators are experienced and wise, and they know what kind of information to look for and how to obtain it. They know how to acquire records legally and have authorized access to data that are not accessible to you or to the public. It is crucial to employ the service of an investigator to get hold of accurate and relevant information without compromising other precious resources like time and money, which you can use elsewhere.


What are the types of due diligence investigations?

Because there are various aspects in business, there are also many types of investigative due diligence that can cater to each area:

Legal due diligence

Does the company own rights to intellectual properties? Do they have contracts with all their partnerships? Do they have previous or current litigations in court?

Financial due diligence

How does the company deal with their finances? Is there a declaration of assets and liabilities?

Commercial due diligence

Does the company have a business plan in force? Do they have a pool of regular clients? Who are their competitors?

HR due diligence

Does the company’s human resource department conduct pre-employment screenings? What is the recruitment process? How do they handle employee grievances?

IT due diligence

Does the company utilize effective data-gathering tools? How do they analyze information? Do they act on intelligence to make business decisions?

Before any big change, it’s all about verifying if the company in question is indeed what they are showing to you. If the other party presents you with their own facts, a due diligence investigation can show you another aspect. Even if you practice integrity and professionalism in all your business dealings, there are still companies that may not mirror your own values.

How willing are you to risk your own business? Due diligence may cost your company a certain amount, but think of it is as a lifetime investment. Not doing a due diligence investigation prior to a major change is like entering into a battle blindfolded—you don’t know what you’re up against.

With due diligence investigations, your company can analyze all the aspects of the other party—allowing you to see the bigger picture. Once it’s clear, you will have the confidence to make informed decisions that will benefit your company without compromise.