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Factors that are Analyzed
and Verified during Due Diligence |
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Track record of the management team
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Size and growth potential of the market
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Demand for product among target customers
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Ability to deliver product on time and at
agreed price
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Competitive advantage of product
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Competitors
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Marketing and distribution plans
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Soundness of
financial projections
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Assessment of assumptions used
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Assessment of
intellectual property rights,
if any
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Existing or possible legal contingences
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Valuation for
the venture.
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Due diligence is a form of research, a reasonable
investigation conducted by the parties involved in preparing a registration
statement to form a basis for believing the statements contained therein are
true and that no material facts are omitted. For the venture capital investment
process, due diligence means a rigorous investigation and evaluation of an
investment opportunity before committing funds. This process includes review of
its management team, business conditions, projections, philosophy, and
investment terms and conditions.
Absolutely vital to making a sound investment,
due diligence verifies any business opportunities that survive the initial
screening stage. For venture capital investments, as few as 10-15 percent of
proposals make it past the initial screening stage to the full due-diligence
process, and only 10 percent of those receive funding. This verification process
consists of checking the accuracy of business plans, audited accounts, and
management accounts; getting replies to warranty and other standard
questionnaires; patent searches; and technical studies. Unpublished accounting
information and subjective information are equally important; these data are
collected by calling customers, suppliers, lawyers, and bankers, and by checking
trade journals. Due diligence emphasizes understanding and quantifying the
risk of the proposed deal, rather than the upside.
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