A thorough homework process is essential to avoid any kind of surprises in business deals that could cause M&A failure. The stakes happen to be high — from lost revenue to damaged brand reputation and regulatory infractions to penalties for administrators, the fees and penalties for not executing adequate research can be destructive.

Identifying risk factors during due diligence is usually complex and requires a mix of technological expertise and professional know-how. There are a number of tools to aid this efforts, including programs just for analyzing economic statements and documents, and technology that enables automated searches across a range of online resources. Professionals like lawyers and accountancy firm are also significant in this stage to assess legal risk and provide precious feedback.

The identification phase of due diligence focuses on discovering customer, purchase and other information that raises red flags or indicates a greater level of risk. This includes researching historical financial transactions, assessing changes in economic behavior and performing a risk assessment.

Companies can classify customers in to low, moderate and high risk levels based on their particular identity information, industry, federal government ties, products and services to be given, anticipated total spend and compliance history. These different types decide which degrees of enhanced research (EDD) will be necessary. Generally, higher-risk clients require even more extensive inspections than lower-risk ones.

An effective EDD process requires a knowledge of the full range of a client’s background, activities and cable connections. This may include the personal information of the best beneficial owner (UBO), information on any data room index financial offense risks, negative media and links to politically uncovered persons. You’ll want to consider a industry’s reputational and business risks, including their ability to defend intellectual asset and ensure data security.