Practicing Due Diligence in Investments and Hiring
When an individual is deciding upon buying a stock or an investment vehicle, the investor is well advised to practice due diligence and thoroughly investigate the investment before placing any money into the investment. This type of due diligence is voluntary. However, if a broker or investment firm is recommending an investment, that firm is required to exercise due diligence
Due diligence also needs to be exercised by a corporation when the corporation is hiring a CEO or another high-ranking executive. This type of due diligence differs from that involved with investments.
What is required for a private equity firm or an investment firm to provide in the way of due diligence? Due diligence is usually defined as a duty to investigate and gather the information on potential and actual risks that may be involved in an investment. What are the steps that should be taken in order to practice due diligence?
First of all, the total value of the company needs to be analyzed. It is a general rule that companies with a larger market cap have more stable revenues and less volatility. It is also important to analyze on what markets the stock will trade as this may also play a role in volatility.
The revenues and profitability of a company must be thoroughly analyzed. It is important to see how the company is bringing in money, and it is important to know if the company has a good margin of profitability. It isn’t necessarily a bad sign if a company isn’t profitable as of yet. However, a potential investor needs to know the risk of the investment, and profitability is a good gauge.
Due diligence also requires that an analysis be made of the competitors that an investment has in the marketplace. An analysis of a businesses competitors will allow the analyst to see if the business is competing well against other businesses in the same or similar sector.
One other important factor in practicing due diligence on an investment is to investigate the management of the company. Does the management have a good track record in other businesses? How many shares do the executives own? This information is helpful in determining future profitability.
When it comes to practicing due diligence in the executive hiring process, another set of criteria has to used. The major priority in this type of due diligence is verification.
It is vital that an executives credentials be checked thoroughly. All of the potential executive’s educational degrees and certificates need to be checked in order to determine their authenticity. It is also vital that all of the former positions that the potential executive has placed on their resume be verified. If the potential executive has claimed to have published articles, this information should also be verified.
It is important to carry out a thorough criminal background check. This check should include state, local and federal criminal records.
Finally, the references of the potential executive need to be checked out. All of the references provided should be contacted and asked about the potential executives performance and character.