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What does due diligence involve?

New York entrepreneurs who are interested in conducting a merger or acquisition may be interested in reviewing the basics of due diligence. Due diligence is the process of understanding the important aspects of a commercial venture, giving a potential buyer or investor a way to vet the business in question. This process can be completed by following a number of simple steps.

First, it may be important for the potential buyer to understand the market capitalization and profit and revenue of the company in question. The size of the caps may serve as indicators of the volatility of the venture's revenue and profit trends. Generally, companies with larger capitalization have a tendency to experience more consistent revenue and profit, and taking a moment to review the trends can give the potential buyer an understanding of the venture's profitability.

It can also be important to take the time to evaluate the company's competitors and make estimates regarding risk. When reviewing the a company's competitors, in addition to gaining a better understanding of the market conditions, a potential buyer could gain a better understanding of the industry as a whole. Furthermore, understanding the possible risks that the venture faces, such as ongoing or potential litigation, can be important as well.

The process of pursuing a merger or acquisition can be a complex endeavor. In addition to establishing a foundation for negotiations by engaging in due diligence, the transaction may be complicated by the competing interests of the involved parties. Those who plan to become involved in such transactions might benefit from consulting with an attorney who is familiar with business law. That attorney may be able to represent the client's interests during negotiations with the other party.

Source: Investopedia, "Due Diligence in 10 Easy Steps", Ryan Barnes, September 26, 2014

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