Due diligence is an extensive investigative journey that must be followed prior to making important business decisions like mergers, acquisitions and investments. It includes everything from financial analysis to legal assessments and operation evaluations. In reality, inadequate or incomplete due diligence is one of the major causes of failures in M&A deals.
The five most popular types are:
1. Financial due diligenceIt is important for all those involved in the process to evaluate the financial health of the company especially prior to an acquisition. This type of due-diligence involves scrutinizing all financial records including the statements on profit and loss and balance sheets as well as a company’s liquidity. Also, it involves looking into existing financial agreements such as contracts and loans.
2. Legal due diligence
To avoid legal issues after an acquisition, thorough legal due diligence is essential. This involves assessing contracts, licenses and any litigation history and ensuring that an entity adheres to all applicable regulations. It is also a good idea to conduct an exhaustive investigation of an organisation’s employees, since it can uncover potential skeletons in the closet.
3. Environmental due diligence
In this day and age environmental sustainability is an essential important consideration for all businesses and this type due diligence helps determine a company’s green practices and potential liabilities, as well as their adherence to sustainable standards. This includes an extensive market analysis such as conducting interviews with customers and analyzing competition. These data can help to create an accurate picture of the company’s current and future commercial position.