The Different Types of Due Diligence
Due diligence is an investigational procedure that is conducted prior to making major business decisions like mergers, acquisitions and investments. It is a thorough review of various aspects of the business and its activities to assess the company’s assets, liabilities and overall financial health. It also evaluates legal risks and compliance. Incorrect or incomplete investigations are among the leading causes of M&A deal failures.
There are several kinds of due diligence, and each one has its own unique set of requirements. However, the primary goal is to discover potential issues that could undermine the transaction or increase risk post-transaction. To achieve this, it’s crucial to have a wide range of resources to conduct the research. This can include paid online information services, databases for specialists and search engines that are free.
There are two kinds of due diligence: hard and soft. Hard due diligence focuses on data and numbers like reviewing audited financial statements such as profit and loss statements including balance sheets, projections and budgets. It also entails a deep dive into a company’s contracts and lease agreements, real estate details (deeds mortgages, use permits and title policies) and the history of sales and purchases. This information must be compared to similar businesses to get an idea of the company’s size and growth potential.