Third Party Due Diligence Meaning and Process

Due diligence involves investigating and assessing the clauses and claims of an agreement or a contract before the parties drawing the contract agree to sign it.

It informs business partners, employees, buyers and any individual or entity involved in the contract what they can expect from going forward with an agreement.

Due diligence forms the foundation of the risk analysis necessary before entering a contract or agreement. This crucial step enables the parties involved in the contract to exercise informed consent and prevent oversight or fraud.

This article is a comprehensive guide to the steps involved in producing a thorough third-party due diligence report.

What is third-party due diligence?

Third-party due diligence specifically involves evaluating the clauses, pros, cons and risks of contracts concerning external entities or businesses that are not already a part of your company. This applies to external sellers, vendors, suppliers, or business mergers and acquisitions.

Conducting thorough third-party due diligence helps verify the legitimacy of the businesses you plan to work with. It confirms their reliability and prevents potential fraud.

During the process of drawing up contracts, it is important to go over the clauses and agreements with a due diligence lawyer so that each party is informed of their duties, responsibilities and what they can expect as a result of their agreement.

This way, all parties can give informed consent before signing the contract. As a result, they can be expected to uphold their part of the agreement and expect the same from everyone else involved.

How to perform third-party due diligence – Complete Process

In Australia, a due diligence report involves checking accounting sheets and legal documents and inspecting the assets and liabilities to come out of the contract. The following steps outline the most effective ways of performing third-party due diligence:

1. Preparing document

Document inspection is the foundation of performing responsible due diligence. Bidders or business partners must inspect documents involved in the contract concerning what it hopes to achieve.

For example, in case of a Merger and acquisition, documents of the companies’ assets, liabilities, cash flow, real estate, investments and more are important to go over. It is also important to identify in this step if there are any gaps in the documents and produce any missing information.

2. Creating a secure data room for the documents

Documents for business agreements, transactions and acquisitions often involve sensitive and confidential information, which is necessary for maintaining the integrity of a company. Hence, the lawyers’ duty to perform types of due diligence reports is to keep such information safe and prevent potential leaks.

3. Disclosure and transparency

Disclosure of terms and conditions and other concerned documents is indispensable during any contractual agreement.

Each party must share these documents with the others involved in the contract before proceeding with any major transaction or acquisition.

4. Reviewing the documents

Once the documents have been compiled and shared with all the concerned parties, it is important to review their clauses, terms and conditions and claims thoroughly.

This is the step where your team of due diligence lawyers can investigate for potential risks, losses, omissions or oversights in the produced contract and its supporting documents.

Here, the lawyers can start compiling questions that the buyers may pose to the sellers before giving their informed consent.

5. Question and Answer

This is the step where buyers and sellers, or all parties involved in the contract, can ask each other questions about parts of the contract or documents that they feel need further clarification or make negotiations with the contract. This is a highly involved process and is central to producing informed consent.

6. Produce Due Diligence report and compliance

After the steps above have been performed, the lawyers must produce a due diligence and compliance report, which outlines details discussed and agreed upon by the involved parties.

Based on this due diligence report, the involved parties can decide to sign the agreement or withdraw from it.

Summing up

Third-party due diligence is a compulsory risk management and mitigation step for any individual or entity involved in a business contract. That’s why it is important to have a competent team of lawyers lend their expertise. Contact the team of the best due diligence lawyers in Perth for safe and secure business ventures.