Due diligence remains one of the most important steps of any merger, acquisition, and other form of high-stakes dealmaking in the contemporary high-speed dealmaking climate. Before going any further, businesses need to consider legal, financial and operational risks carefully.
One of the choices companies have to make is whether to do due diligence internally or hire an external company. All of the approaches have unique pros and cons. We will discuss both of these options below to assist you in deciding which model fits your business requirements.
In-House Due Diligence
Pros
Deep Institutional Knowledge –
Internal teams already know how the company operates, what the culture is like, and what risk appetite it has. This knowledge enables them to notice red flags that are not easily noticed by outsiders.
Control and Confidentiality-
Sensitive business data remains in the company and this eliminates any doubts on data leakage or mishandling by outsiders.
Economy (in Part Cases) –
When the company has an effective internal legal and compliance unit, using the available resources might be more cost effective than hiring third parties.
Cons
Resource Strain –
Third party due diligence meaning is time consuming. The cost of hiring in-house personnel can leave the remaining business functions behind as they are assigned to different duties.
Inequal Expertise-
In-house units might not be as specialized in a given field, e.g. international compliance, or a specific regulatory concern or industry risk.
Scalability Issues –
Large or complex transactions can outperform the internal resources and cause analysis to be incomplete or delayed.
Outsourced Due Diligence
Pros
Niche Specialization –
Law firms and advisory firms possess sector-specific expertise, regulatory experience, and technical expertise that internal teams can be lacking.
Efficiency and Speed –
Special purpose external teams are crafted to cope with the massive workload of due diligence, to facilitate more rapid transactions.
Objective Assessment-
External advisors give an unbiased opinion that is not clouded by internal influences.
Scalability –
Outsourcing enables business organizations to rapidly increase capacity to support big or multiple deals at once.
Cons
Raised Prices –
Law firms, consultants, and due diligence fees could be high, especially in transactions that are complicated.
Data Security Concerns-
When sensitive company information is shared with third parties, strict confidentiality agreements and proper selection of vendors is required.
Reduced Knowledge of the Internal Culture –
Foreigners can fail to pick some elements regarding the unique activities of the company or its strategic priorities.
What is the Right Approach to You?
The decision on whether to in-source or outsource due diligence usually hinges on:
Transaction Size and Complexity –
Smaller deals can be handled at the internal level, but big deals or cross-border deals are usually handled by outsourcing.
Internal Capabilities –
Firms that have a robust legal, compliance and finance team are more apt to have in-house reviews with some specific external input.
Budget and Timelines –
Outsourcing can prove to be a more costly investment, but the time saved and the depth and completeness can be worth it.
A Hybrid Model: The Best Of Both Worlds.
A hybrid approach is embraced by many organizations, which involves incorporation of both internal knowledge and external knowledge. An example would be having an in-house legal department do some of the initial document reviews, but outsourcing certain specialized work such as regulatory compliance or intellectual property analysis to outside counsel. This balance has the potential to offer cost effectiveness, confidentiality, and broad coverage.
Conclusion
Whether in house, outsourced or using a hybrid approach, due diligence is a key to safeguarding your companies interests in any transaction. The advantages and disadvantages of the business should be weighed against its resources, schedules, and risk appetite. An individualized strategy means that the risks are identified before they can turn into expensive surprises.