Due diligence is an in-depth examination that must be conducted prior to making crucial business decisions such as mergers, acquisitions or investments. It covers everything from financial analysis to legal assessments and operational evaluations. In fact, incomplete or insufficient due diligence is the primary reason for failures in M&A transactions.
The five most common types of due diligence are:
1. Financial due diligence is vital for all parties involved in the process to examine the financial health of the business especially prior to an acquisition. Due diligence involves scrutinizing all financial records including profits and losses statements in addition to balance sheets and the company’s liquidity. It also involves examining existing financial agreements such as loans and contracts.
2. Legal due diligence
To avoid legal complications after the acquisition, a thorough legal due diligence is crucial. This includes reviewing contracts, licenses, and any litigant history, and verifying an entity adheres to all regulations applicable. It’s recommended to conduct a thorough audit of employees at an organization, since it can uncover potential skeletons lurking in the closet.
3. Environmental due diligence
In this day and age environmental sustainability is an essential top priority for all businesses and this type of due diligence helps determine a company’s green practices and liabilities https://aboutvdr.com/ as well as its adherence to sustainability standards. It also involves analyzing the market, for example by interviewing customers and looking at competitors. These information can be used to construct a more complete picture of a company’s business position, both now and in the near future.