The Importance of Due Diligence for SMEs

SMEs have suffered greatly over the past two years due to extending pandemic lockdowns. During this recovery period, it’s important to manage financial resources as well as avoid taking risky actions that can result in further losses or lead to legal issues. This is when due diligence comes into play!

Due diligence refers to the process of investigating facts and verifying information when recruiting employees or making critical business decisions such as mergers and acquisitions or investments in potentially profitable ventures.

Through a comprehensive investigation, a business entity can gather relevant information and make better and informed decisions. While due diligence is extremely important for SMEs, it’s not always easy to conduct a detailed investigation since it’s time-consuming and quite complex. So, it’s better left to professional private investigators to safely get results.

Due Diligence for Mergers and Acquisitions

Do you plan on acquiring another business or merging your firm with another business? Then conducting due diligence for mergers and acquisitions can assist you in avoiding problems down the road.

Through the diligence process, you can verify information about finances, legal liabilities, human resources, and operations of the said business. The following are the prominent types of due diligence in mergers and acquisitions:

Financial Diligence

Financial due diligence is concerned with evaluating the financial position and overall performance of the business you intend to acquire. For instance, you would want to verify they provided accurate information about their financial assets, yearly revenue, and debts.

For this purpose, PIs may review financial statements, cash flow statements, profit and loss records for the past few years and reports of loans and credit obtained by the company.

HR Diligence

Human resource due diligence not only provides information about the workforce, but also offers insights into the organisational culture. It’s essential to look into the organisational hierarchy, HR policies, payroll processing system, employee contracts, and recruitment policies to understand the people risk.

Along with employees, you may also want to look into the customer base and target audience of the business. On your behalf, the private investigator would examine consumer risks, customer personas, retention rate, and customer backlog details to ensure you would be a good strategic fit.

Legal Diligence

To identify potential legal liabilities and determine if the target company has been involved in lawsuits, it’s a good idea to hire a PI to conduct legal due diligence.

Reviewing legal documents, contractor agreements, licensing documents, and loan documents can help in this regard. Also, go through the copyrights, trademarks, and patents of the organisation to ensure they conduct business in a legal and ethical way.

Furthermore, you should also do tax due diligence by evaluating the tax liability of the business to ensure they comply with local taxation laws by filing accurate tax returns on time.

Environmental Diligence

Violating environmental laws such as the National Environment Protection and Biodiversity Conservation Act 1999 can lead to penalties and fines. So, monitor the operations of the company to determine whether they have obtained environmental permits, ensure that business operations don’t harm the environment, and waste is disposed of in a safe manner.

To be precise, due diligence for mergers and acquisitions comprises the following steps:

• Verifying business documents
• Evaluating financial statements and assets
• Reviewing business operations
• Examining the organisational culture
• Looking into legal liabilities and legal contracts
• Ensuring that the business complies with regulatory laws
• Identifying performance metrics and comparing them with actual performance
• Interviewing existing and past employees
• Monitoring the online and offline reputation of the business

Corporate Due Diligence for Employee Screening

When it comes to recruiting employees for vacant positions, the HR department shortlists candidate resumes based on their skills, interviews them to enquire about their experience, and chooses the most suitable candidate. But an important, yet sometimes, overlooked aspect of the recruitment process is employee screening.

Due diligence in the recruitment process assists in verifying the information provided through resumes and ensures that your potential employees possess the expertise required for the job. Moreover, it’s helpful in establishing a workforce that’s less likely to engage in unethical activities.

Failure to conduct due diligence during employee screening may result in the following problems:

• You may hire employees who lied about their skills and past experience
• Bad hires fail to perform assigned tasks
• Such employees also lower the morale of others especially when they are appointed in managerial positions
• You end up losing the chance of hiring a more skilled and suitable candidate
• Potential legal issues due to the unethical behaviour of employees
• Unsafe work environment
• Dissatisfied customers
• Sales and revenue may drop

Since HR employees can’t always perform a comprehensive background check due to limited resources and expertise, it’s better to outsource the task to a reputable private investigation firm.

PIs aren’t only experienced at carrying out corporate due diligence, but they also understand the legal requirements and boundaries of the investigation. They can aid you in optimising the hiring process by validating the educational background and work experience of candidates, verifying references, and ensuring the person wasn’t reported for violent crimes in the past.

However, it’s important to note that discriminating against candidates due to their background can result in legal issues. So, make sure you review the investigation report to ensure you make a fair and informed decision.

Conclusion

Whether an SME intends to form a strategic partnership with another business, acquire another operational business, invest in a start-up, or recruit employees, the due diligence process can prove effective in verifying the information and making informed decisions accordingly.

When hiring a private investigator for Due Diligence, make sure you opt for a reliable investigation firm that is licensed, insured, and has vast experience in managing similar corporate cases.