by Lori Wade
Outsourcing is more or less a necessity in the current business landscape. Businesses now tend to hire third-party companies to help them with certain tasks in an attempt to save on costs and labor. And one of the most common tasks outsourced by almost every company is that of due diligence.
Due diligence is an essential part of a merger or acquisition, yet it is a very risky endeavor. Due diligence data room provides a single space for multiple parties to access and request information and store documents & files for an M&A transaction. Therefore, to minimize the risk of an M&A, companies will often hire a third party.
But these third parties often bring their own fair share of risks to the table. Along with the benefits of experience and outside perspective, companies also bring in the risks of corruption, regulatory compliance, IT, and operations, among others.
These are all risks that companies have to assess when choosing a third party. However, merely choosing the right third party is not enough. Your company will have to take more steps to ensure the effectiveness of due diligence by the third party. Here are a few ways that can, in turn, increase the effectiveness of your due diligence.
Ways to Improve the Effectiveness of Due Diligence
Trust is the bedrock of any good relationship with a third party, but that trust can only get you so far. Transparency and vigilance, regardless of trust, is important, as it ensures that both companies are on the same page. Here are a few ways that you can improve the effectiveness of third party due diligence.
1. Leverage External Content
Internal screening, risk assessments, and continuous monitoring are, without a doubt, important of third party due diligence. However, it is always good to take information from outside of your country during due diligence. A multitude of companies prefers using external data sources to track information that would help them validate the third party. Sources like sanction lists and credit ratings make for exceptionally verifiable resources.
These resources can provide a good and complete assessment of a third party’s risks. And you can choose to go through these resources manually, or you can automate these services. External content can provide a lot of insight into the third party and provide valuable information.
2. Centralize Third-Party Information
Third-party companies that manage due diligence of a merger are often big companies with a large base of operations. And while it is very rare, important information can get lost. Hence why you need to consolidate with the third party and combine information. This will keep your data away from all of theirs and will give you more transparency about the information that they are using.
Keeping check of your third party is very important, as it ensures that no wrong information is being used in due diligence. This information includes business details, background checks, third-party agreements, and contracts.
3. Establish a Proper Escalation Process
Escalation is a very common part of any business operation, including M&As. That said, companies will often disregard escalation complaints or will avoid escalating problems entirely. Not escalating problems to the right people at the right time can lead to very serious problems, which can prove to be very difficult to solve later in the future.
Other than addressing complaints and escalating them to the right people during the M&A, it is also important that employees have a proper place to give their complaints. Your company should use an escalating process to address complaints and deliver them to the right people. By addressing problems and complaints as they come, you can save your company from a world of hurt.
4. Proper Screening of Third-Party Companies
Companies will often screen the third-party companies that they choose when they are making their decision. But some companies also make the mistake of not properly screening their third-party company before getting into a contract. When screening the third-party company, you should check factors like their dependency, office culture, accessibility to sensitive information, transparency, and their legal history as well as current standing.
Seeing how you will closely be working with the third party, you have to ensure that they do not have any legal or financial problems, as it can have repercussions on your company as well.
5. Make Use of Experts
Other than screening, the business that you will be working with, it is also important to work with experts in their respective fields. Depending on what specific part of the M&A you are working on, you may require help from HR experts, accountants, tax experts, and even marketing specialists, among others.
Now, these experts are, of course, other than the third-party company that you will be working with throughout the M&A. Experts often only provide their help sparingly, and for a good reason, they can be quite expensive. So be sure you plan exactly how much of their help you want, and what specific problems you want their help to solve.
6. Make a System to Manage Third-Party Companies
The M&A process is one that is very difficult and incredibly risky, so to minimize the risk, you may employ the help of different third parties. But working with all this extensive outsourcing can be very difficult to track. Therefore, you should have a proper system to track all of your company’s outsourcing. This will help you financially, as you can track all of your expenses. Moreover, tracking these expenses will help with future planning.
Every Merger Is Different
Although due diligence is, without a doubt, vital and common in every merger, no two mergers are the same. Whether it is the company that you are merging with, the third party that you contact, or the market that you are entering, every M&A is different. Therefore, you should treat every merger as if it is something that you have never faced before.
That is not to say that there is nothing to learn from prior mergers. All the experience from your prior M&As plays a major role in the success of future projects. But you should not let that experience cloud your judgment.
In conclusion, M&As can be very risky and extremely difficult to complete. However, with proper due diligence, you can improve the likelihood of success for your merger.
Lori Wade is a writer who is interested in a wide range of spheres from business to entrepreneurship and new technologies. If you are interested in M&A or virtual data room industry, you can find her on Twitter & LinkedIn or find her on other social media. Read and take over Lori’s useful insights!