Due diligence for investors has always remained a laborious and complicated task that is mandatory for the successful realization of any business transaction. The inherent time consuming nature along with the complexities involved in the process compound the problems for the parties involved in negotiating a deal. No matter how skilled and experienced the professionals hired for the purpose may be, there is always room for human error because of the vast amount of detailed data that needs to be scrutinized. A solution to this problem has been presented by technology in the form of Artificial intelligence or AI. Let’s see how this innovation can be useful for any entrepreneur in a process like due diligence for sale of business.
Before listing the advantages of technology for the process of due diligence, it will be pertinent to provide a definition of AI for people who may not be technically proficient. Artificial Intelligence evolved from a theory that computer systems should be able to perform tasks which require human intelligence, such as recognizing speech, visual evaluation and some amount of decision making. The process involves obtaining information by a machine which it can process according to some specified rules for making an approximate or exact decision.
A reader may feel that the whole idea is to replace humans but that is impossible and the main objective of employing any technique based on AI is to perform some repetitive tasks in lesser time than humans and increase the efficiency of any process.
Let’s now take a look at the benefits of using AI for due diligence.
The biggest challenge that companies or investors face while conducting the due diligence process is to find the relevant information from the huge amount of data available. The problem is compounded by the fact that usually data is stored at multiple locations and if either of the entities involved in the transaction has been in existence for a considerable amount of time the size of the data bank will be simply humongous. The possibility of an error occurring during the assessment of the documents like credit agreements, property ownership details, contracts etc. for evaluating the feasibility of the deal, is great. An AI based tool or system will comprehensively analyze the whole data meticulously to find all the appropriate information that will help the professionals conducting the process in making a detailed and error– free assessment.
When accounting, legal or any other professional start analyzing the data of an organization during a sensitive negotiation such as Mergers and Acquisition (M&A) transaction, their primary motive is to identify potential hurdles to the deal. There may be an indemnification clause in a contract that may prove to be a financial liability for the acquiring organization and if hidden in a pile of unnecessary data, is missed by human evaluators , can prove to be detrimental to the transaction. A failure to detect problems will also harm the prospects of the target company as its valuation will suffer. A system that has been fed all instructions relevant to the process, is bound to detect the problem and will prove to be extremely beneficial in minimizing risks for not only the companies involved in the negotiations, but also for the experts hired by them.
A key concern for any entrepreneur during the whole process is the protection of sensitive data such as Intellectual property (IP) or any other confidential information like trade secrets. A technique called redaction is used by evaluators which involves hiding any commercially sensitive information apart from all details like name, address, photos etc. that may be used to identify a person, by either hiding the data or using generic terms or pseudonyms. The whole procedure, if fully undertaken by humans is prone to oversights which will lead to the leaking of data that will prove harmful to either of the two parties,in case of an unsuccessful transaction. An automated redaction process will not only be conducted in a shorter span of time but the process of checking and rechecking to ensure the security of the information will also be fully efficient and foolproof.
Time and costs are the two major factors affecting any process of due diligence for investors and AI can be used to reduce both of them drastically. The large amount of data that needs to be sorted for finding relevant information and then other processes like redacting not only need a lot of time but also the hiring of a large number of professionals to complete the analysis. Once machines are employed to do all the repetitive tasks, not only the speed at which the process is being conducted increases but also the efficiency improves substantially. The usage of technology also reduces the amount of human resources that need to be employed thus reducing the cost of the whole enterprise. A faster and cost effective auditing of all the records will be helpful to any investor looking to close a deal successfully.
Every major economy of the world is regulated by a set of laws and all activities by commercial organization are governed by one or the other law. An efficient process of due diligence is important not only for fruitful negotiations between the two parties involved in a deal but also for meeting the regulatory requirements necessitated by the applicable laws. AI based tools that help in pattern recognition and analysis of unstructured data will help in spotting anomalies which can be beneficial in the drafting of successful application that need to be presented to the relevant government agencies. The quick time in which documents can be presented for getting permissions is a big advantage as the swift conclusion of the deal will help in keeping the involved entities ahead of the competition.
Artificial Intelligence can be extremely useful in increasing the efficiency of any organization and the application of the technology in conducting due diligence for investors will be immensely helpful in improving the success rate of financial deals.