What is due diligence and why is it important?

Don’t leave your business vulnerable to lawsuits just as you’re starting out – learn what ‘due diligence’ is and where it’s applied to in business with this article.

We’ll walk you through what you need to do to take due diligence, why it’s important, and the steps you’ll need to follow to cover yourself as you’re growing your business. Discover:

• What is due diligence?
• Why is it important?
• Where is due diligence relevant and why?
• How can you take due diligence?
• How to take due diligence over your finances with Countingup

Due diligence can be applied to various business situations so the definition of what ‘due diligence’ is in each circumstance will slightly change depending on the context. In general, it means to carefully and thoroughly research someone or something (a business, product, or opportunity for example) to make sure what you know is correct. This could be about its value or the claims that are made about what it can offer you.

Exactly what questions you should look to answer during your research process will depend on whether you’re investigating something financial, legal, or personal about someone you’re about to hire.

Due diligence is important because it helps protect your business. Risk to your business’ future comes in many forms and from many places, so taking the time to research and find out more about what your business is interacting with can help you reduce this risk.

Otherwise, you could be liable for something you didn’t intend to cause and have to pay financial compensation to help settle what’s happened. If you’re lucky, the sum might be small and manageable enough that you can cover it. However, without due diligence, you could face potentially disastrous fees, which makes the time and effort investment during research much more worth it. 

In other scenarios, you could be left with a business asset that turns out to be more of a liability to your business. We touch more on this topic in our article What are assets and liabilities in a business?. In it, we provide examples of liabilities your business may face and how they’re simply a normal part of doing business.

Due diligence comes into play to analyse the relationship between assets and liabilities: helping you decide whether it’s better for you to buy, sell, take an opportunity or avoid it all together.

Due diligence is relevant in almost every part of your business, but we’ve outlined some of the more common ways it should manifest in your organisation below.

Compliance with UK laws is mandatory – whether you know about it or not. Specifically, laws affecting businesses range from anti-discrimination legislation, accounting transparency requirements, staffing and wage standards, environmental statutes and more. 

You need to take due diligence to familiarise yourself with these laws to make sure you’re complying with everything you need to, especially if more niche regulations apply to your industry (like waste disposal or safety standards with food, animals or children).

Financial due diligence is a little easier to understand. For your own business, it involves making sure you’re profitable, your cash flow is healthy, and that your financing methods (such as bank loans or start-up grants) are manageable and used well.

For other businesses and products, it involves looking at what the company publishes in their accounts (if they’re a limited company), as well as the value it holds versus what the rest of the market offers.

If you’re hiring staff to help you take on tasks as your business grows, due diligence needs to be part of your interviewing and decision making process.

Depending on your business, it might look like ensuring they’ve got a degree, no prior criminal convictions, whether they’re certified to work with children, or attaching a non-compete clause in their contract to protect your business interests.

As you’re advertising your business or speaking with potential investors, completing due diligence to understand your wider market can help you grow your business with more insight.

Communicating exactly how your business is better than the competition helps your customers and lenders/investors see why you’re valuable worth spending money on in comparison.

You can do a lot of your due diligence by simply asking the right questions, specifically ones that you don’t yet know the answer to. 

Exactly how you’ll take due diligence will depend on which area of your business you’re looking to investigate. For example, your process for analysing your business’ financials will be very different from your process for hiring staff. Nevertheless, confirming the claims and status of things your business interacts with, as well as asking leading questions like why and how can help you get the understanding you need.

Don’t forget to use experts like lawyers, accountants or your staff to make sure qualified specialists back up your understanding and future strategy.

As you’re looking for ways to save time and perform due diligence on your business’ finances, make Countingup part of your solution. Thousands of business owners are using the Countingup app to save time on their financial admin and focus on growing their business. 

Countingup is the business current account and accounting software in one app. It automates time-consuming bookkeeping admin for self-employed people across the UK and provides all the same insight with less effort on your part.

With automatic expense categorisation, receipt capture tools and cash flow insights, you can confidently keep on top of your business finances and save yourself hours of accounting admin, so you can focus on doing what you do best.

The app comes with tax estimates and invoicing tools to help complete routine business tasks while still keeping your legally compliant. Gain complete confidence in your finances and save time for completing due diligence for the rest of your business. Find out more here and sign up for free today.