Traditionally, due diligence has meant a detailed investigation to confirm facts and identify risks before making significant business moves, such as investments, acquisitions, or partnerships. It primarily focused on hard data, including audited financial statements, tax records, legal compliance documents, and market performance. The goal was simple: to make sure everything “checked out” before money changed hands.
This practice took shape after the U.S. Securities Act of 1933, which required dealers and brokers to fully disclose all material facts to potential investors. Those who could prove they had exercised “due diligence.” Basically, those who took reasonable steps to verify information were protected from liability if something undisclosed later came up. Over time, due diligence became a standard process in business dealings, especially in determining whether Investors invest or not.
Today, investors have learned that solid numbers alone don’t guarantee stability. Companies can look profitable on paper and still collapse from weak internal systems or poor leadership. This has led to a new focus: Corporate governance as a key component of due diligence.
Investors are now asking these types of questions:
- Who makes decisions, and how transparent is that process?
- Are roles clearly defined, or does everything depend on the founder?
- How are risks identified and managed?
- Is data handled responsibly and securely?
Governance gives investors confidence that a company can sustain itself beyond the founders’ vision. It reduces legal and reputational risks, signals maturity, and shows that management values accountability. In emerging markets like Nigeria, where regulatory frameworks are still evolving, strong governance often becomes the only reliable measure of credibility.
In essence, due diligence is no longer just about discovering what a company has; it’s about understanding how it operates. Good governance turns that process from reactive verification into proactive assurance, which is the difference between checking a company’s books and checking its backbone.
Legal Framework For Due Diligence In Nigeria
Due diligence is governed by various laws, particularly the Companies and Allied Matters Act (CAMA), which provides the legal framework for conducting business and corporate acquisitions. Companies must maintain proper books of accounts, which should be accessible during due diligence. This legal aspect of business ownership and registration ensures that foreign investors verify the company is legally registered and compliant with all relevant laws. The Company’s board of directors are to disclose material information that can affect the acquisition process, ensuring transparency during due diligence.
The acquisition of Mobil Nigeria by ExxonMobil is a strong example of how proper due diligence leads to success. ExxonMobil conducted a thorough review of Mobil Nigeria’s assets, liabilities, and compliance with Nigerian laws, ensuring full transparency before finalising the deal. This careful preparation allowed for a smooth transition and strengthened ExxonMobil’s operations in Nigeria. In contrast, Kodak’s partnership with Kmart shows the danger of neglecting due diligence. Kodak failed to assess Kmart’s weak financial position and declining market share before entering the deal. When Kmart later went bankrupt, Kodak faced heavy losses. The case highlights why companies must look beyond numbers to evaluate operational and financial stability before any major transaction.
Best Practices for Effective Due Diligence: Strengthening Corporate Governance
- Conduct a Thorough Financial Review
The financial health of a company is often the first signal of its governance strength. Reviewing income statements, balance sheets, and cash flow records helps investors assess not only profitability but also financial transparency and accountability. In Nigeria, compliance with the Companies and Allied Matters Act (CAMA) on proper bookkeeping under Section 374 is key, as it ensures the company’s financial disclosures can withstand investor and regulatory scrutiny.
- Verify Legal and Regulatory Compliance
Investors expect assurance that the company operates within the boundaries of the law. This means verifying compliance with CAMA, tax regulations, labour laws, and any sector-specific statutes. A company that consistently meets its filing and disclosure obligations reflects good governance and reduces the risk of legal liabilities. Failure to comply can lead to penalties or regulatory sanctions that not only affect financial performance but also erode investor confidence.
- Assess Operational and Governance Structures
Beyond legal paperwork, investors evaluate how the business actually functions. This includes assessing internal controls and how decisions are made. Companies with clearly defined leadership roles demonstrate transparency and accountability, which investors value highly.
- Evaluate Intellectual Property (IP) Ownership and Protection
For many startups and tech-driven businesses, intellectual property is the most valuable asset. Investors look for evidence that IP rights are properly documented, registered, and legally owned by the company. Proper IP governance not only protects competitive advantage but also prevents legal disputes that could derail future investments or acquisitions.
- Engage Local Legal and Financial Experts
Due diligence in Nigeria can be complex, given the evolving regulatory environment and jurisdictional differences. Involving local counsel and financial professionals also strengthens governance by ensuring adherence to Nigerian corporate standards.
Conclusively, Due diligence has become more than a financial checklist; it’s a governance test. Investors now look for structure, transparency, and accountability, not just profit. Strong corporate governance builds trust, attracts capital, and keeps a business sustainable in the long run. At Nedellum, we help startups and growing businesses strengthen their governance frameworks, prepare for investor due diligence, and build the kind of legal and operational structure that inspires confidence from day one.
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