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Understanding Due Diligence

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The term due diligence may mean many things, as it is a term that has been thrown around a number of different industries. For the most part, however, due diligence is all about making sure that all of the information about a company is up to date and is available to look at. In many ways it is similar to an audit, only without government influence. Due diligence is usually done when potential investors or partners are trying to figure out if your company is a good fit for them.

Why It Is Important
Due diligence is extremely important for both sides of any business situation. For the potential investor, it is a great way for them to learn exactly who a company is and what they are all about. They can learn information about their financial situation as well as about their personnel, contracts, marketing, production, and management situations, as well as many other things that would be important to a potential investor or partner. It is also an excellent way to prevent someone from swindling you, as many investment opportunities are not really opportunities but are scams that are designed to relieve some of your cash from your bank account.

If you are a valid company then due diligence can be a great thing! To begin with, it helps you by getting everything in order for your company. Many companies who undergo due diligence discover that they learn more about exactly who is working for them and what is going on than those who never have to partake of it. It also makes things easier for you when it comes to investors, as they can feel much more comfortable working with you if you have come clean about everything in your company.

What is Required?
What is required for due diligence? It depends on how detailed you want to get. Some companies put together their financial package along with their marketing strategies and claim that they have done due diligence. Others, however, take things a step further, which may be a good idea. They speak with employees who work at the company and tie together documents with people’s memories in order to get a true picture of what exactly goes on at the company. If you are an investor, you may want to speak with as many employees as possible, but remember that memories can be faulty, so back up everything you can with documentation. Also remember that sometimes employees will say one thing to your face because they know they are being judged while they say another behind your back, so always take everything you are told at face value.

Sometimes due diligence is done right out in the open, by a company or by someone who is looking to invest in the company. Other times, however, it is done on the sly, with the company that is being investigated none the wiser about the investment. If you choose to do due diligence on the sly, make sure that you comply with the Fair Credit Reporting Act.

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