Due diligence is a comprehensive investigation that must be conducted prior to making business-related decisions such as mergers, acquisitions and investments. It encompasses everything from financial analysis to operational assessments and legal assessments. In reality, inadequate or incomplete due diligence is among the major reasons behind unsuccessful M&A deals.
The five most common types of due diligence are:
1. Financial due diligenceIt is important for all those involved in the process of evaluating the financial health of the company particularly when it comes to an acquisition. This type of due diligence involves looking over all financial records such as the reports on profit and loss as well as balance sheets and a company's liquidity. It also involves examining existing financial agreements, like loans and contracts.
2. Legal due diligence
A comprehensive legal due diligence process is vital to avoid legal complications post-acquisition. This includes assessing contracts, licenses and any litigation history as well as ensuring that the entity is in compliance with all applicable regulatory requirements. It is an excellent idea to conduct a thorough examination of employees at an organization, as it can reveal any potential skeletons lurking in the closet.
3. Environmental due diligence
In this day and age environmental sustainability is a top priority for all businesses, and this type of due diligence helps determine the company's green practices and potential liabilities, as well as their adherence to sustainability standards. This involves an extensive market analysis, like interviewing customers and analyzing the competitors. These data can be used to create an overall picture of a company's business position, now and in the future.