debita diligentia.

Hasty, Inadequate or Non-Existent Debita Diligentia (That’s Due Diligence to You and Me)

In too many instances, businesses and Governments are so eager to “do the deal”, or under such great pressure to execute a deal, that they perform hasty or inadequate due diligence. In all cases it is prudent to weigh up the not insignificant time, cost, and effort of undertaking due diligence against the potential quantified and unquantified risks if it is circumvented.

Failure to undertake adequate due diligence and then take appropriate action based on the findings, will, inevitably, cost a lot more. It may also have far reaching consequences to the organisation’s ability to meet customers’ needs and achieve strategic goals.

Even if your prospective customer or supplier appears to be reliable and reputable, agrees commercial terms and at a price and timescale that meets the stated need, this amenable result does not lessen the need to conduct appropriate due diligence…And if an urgent deadline is imposed to execute a deal that appears to be too easy, too simple or even too good to be true, the need for due diligence is even greater e.g. ever had a deadline imposed at the 11th hour to meet the other party’s accounting period end?

Risk Benefit Analysis

It is recognised that in some situations a complete and thorough due diligence is not feasible. For example, in large asset based transactions, it may be impossible or economically impractical to perform a complete investigation. When this occurs, a thorough risk benefit analysis should be performed to determine the scope of viable due diligence. If thorough due diligence will not be performed, each of the parties should consider including provisions providing compensation (or even exit) if representations, warranties or other contractual assumptions later prove to be inaccurate.

Summary

In short, due diligence should be assumed to be norm and a necessary burden to confirm the deal, so parties should include provisions in their contracts to ensure that there is a contractual process describing how due diligence was, or can be performed and the reliance placed upon it understood, so that in the event representations made turn out to be inaccurate, appropriate protections exists which can be invoked as necessary. Failure to undertake appropriate due diligence is rarely a gamble worth taking.

 

Robin O’Connor

Robin O’Connor is a Director at ASE Consulting. The company was founded in 1987 and is established across a wide range of markets providing high quality services which bridge the gap between an organisation’s high-level business objectives and technology.