Due Diligence Explained
Due Diligence is defined by Google as “reasonable steps taken by a person in order to satisfy a legal requirement, especially in buying or selling something.”
We generally do due diligence when we:
- Sell something – will the purchaser pay up and/or honour the other parts of the deal?
- Purchase something – are we getting what we think we are purchasing?
- Hiring/dating someone – are they the person we anticipate them to be (skills, knowledge, background, character etc?)
Due Diligence involves “Buyer Beware”
If we are buying something / hiring someone/ dating someone it is usually the other party who has more to gain by positively misrepresenting themselves.
It is human nature to present ourselves in the best possible light when we are going after something we want – a new job, a new partner, a promotion, a pay rise, or a new customer/contract.
If you sign the agreement, hand over your money, or other precious assets, only to find you do not receive what you expected – it is generally too late. You did not do your due diligence adequately.
The problem is often so obvious in hind- sight! But we did not see it because we were emotionally involved and not making rational decisions (even although we thought we were).
In a commercial situation involving misrepresentation you may be able to sue for damages, if you have sufficient resources and adequate grounds to make a claim.
Buyer’s remorse is the sense of regret after having made a purchase. It is frequently associated with the purchase of an expensive item such as a business, vehicle, or real estate, and we second guess ourselves as to whether we have made a good decision or not.
Buyer’s remorse is natural. It does not mean you made a mistake. It does mean reassessing our decision with hindsight (and perhaps regret).
The best way to avoid Buyer’s Remorse is to do good due diligence.
How Much due Diligence Is Enough?
Due diligence costs time, effort and money – all of which are in limited supply. The general rule is due diligence, research or analysis should be proportionate to the risk and the importance of the decision.
For example, if you are going on a date in a remote location with someone you only just met on-line you would normally do much more due diligence than if you are going on a coffee date in a busy urban area.
Similarly, a business deal that would be regrettable but affordable if it goes wrong requires less due diligence than a deal that would make or break you financially / personally.
Ego is Often the Issue
When we get emotionally involved with the outcome we are pursuing the decision is no longer a logical one. There are few of us who have not been there.
When ego or emotion is the decision maker stop and re-evaluate. Get second opinions from those you trust or who are experts in their field. Listen to their feedback. Don’t assume you know more than they do. And most importantly, avoid emotionally driven decisions.
Q2 are experienced in assisting with due diligence during acquisition of SME businesses. Contact us if you would like to discuss your options further.
“Diligence is the mother of good luck”