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due diligence

Due diligence has become somewhat of a buzzword for entrepreneurs and business owners these days, and for good reason. Though it may seem like a fluffy or vague term, due diligence actually has a specific but widely applicable meaning. It is a way of taking care of customers and keeping your business safe.

What Is Due Diligence?

Due diligence is a broad term that, in its most basic form, means to take all reasonable steps to avoid committing an offense in both a legal and moral sense. The precise meaning of this differs for different industries, but it always comes down to three main factors:

  • Safety
  • Legality
  • Responsibility

For those in financial services, for example, it means keeping a paper trail to show that regulatory requirements and necessary checks have been made. For those who work in hospitality, it can mean keeping records of food temperatures, spoiled food destruction, and the regular maintenance of equipment. It’s all about showing you have done your research and have taken all necessary and reasonable steps to provide a fair, ethical and safe service.

Why is Due Diligence Important?

Since the stock market crash of 1929, the concept of due diligence has been steadily creeping into every industry in the world. The financial sector was the first to be impacted in a legal sense, with the Securities Act of 1933 one of the first regulatory changes requiring due diligence and transparency to protect investors.


These days, most industries have some regulations that require companies to complete, and keep records of completing, acts of due diligence. The legal consequences of non-compliance can be enormous; due diligence is simply the cost of business now, and if you don’t take adequate measures or fail to record your acts of due diligence, you could find yourself out of business.

As well as business implications, failing to follow through on due diligence requirements can have legal and financial implications. Failure to comply with regulations could end in prosecution, fines, or in severe cases, both. In fact, for lawyers and those working in financial services, severe infractions can result in disbarment or revocation of your license. Thankfully, there are many resources out there for companies and sole traders looking to improve their customer due diligence.

What Are the Types of Due Diligence?


Due diligence means something different to individuals and entities in different areas of business and commerce. However there are specific industries that have more stringent requirements. Broadly speaking, there are four different types of due diligence:

  • Financial
  • Legal
  • Operational
  • Environmental

The financial sector, of course, has some of the most stringent due diligence regulations with businesses and entities being required to complete audits, investigate the accuracy of financial records, and complete intense research. Legal due diligence is generally undertaken in the creation of contracts, mergers and other such actions. It is intended to determine where the parties in question stand in terms of their obligations to each other.

This kind of due diligence includes contracts, the keeping of corporate documents and board meeting minutes, and the research of local regulations. Operational due diligence refers to actions taken to evaluate the condition and effect of operational procedures, the conditions of technology, and the state of assets to unearth any hidden risks or liabilities. Environmental due diligence, as you might imagine, is undertaken to analyze and control the environmental impacts of business operations.

The average business will need to complete due diligence checks and actions in each of these areas (with the exception of environmental, as this is most relevant to industrial production). As such, it is important to have a good understanding of the legal requirements within your industry and area. Investing in good due diligence tools can make this process much easier.

Who Can Benefit From Due Diligence Tools?

Due diligence can be incredibly time-consuming, expensive and inconvenient to undertake personally and manually. As such, Tracers Due Diligence tools, which are designed to make the process as easy as possible, are useful many entities, including but not limited to:

These tools can help you effectively maintain compliance with local regulations, understand who is behind legal entities you may be dealing with, analyze the impact of your business decisions and operations and form better relationships with industry contacts and your customer base.

 

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