The Different Types of Due Diligence

Due diligence is an intense investigation process that is conducted prior to making any major business decision like mergers, acquisitions and investment decisions. It is a thorough review of various aspects of the business and its operations to assess the company’s assets, liabilities, and overall financial health. It also checks legal risks and compliance. M&A deals that fail are often the result of insufficient or incorrect investigations.

There are several kinds of due diligence and each has its own unique set of requirements. The primary objective is to identify potential issues that could undermine the deal or increase risk post-transaction. To achieve this, it’s important to have a variety of resources to conduct the research. This includes paid online information services, databases for specialists and free search engines.

There are two kinds of due diligence: hard and soft. Hard due diligence is founded on data and numbers like audited financial records, profit and loss statements, balance sheets, budgets, and projections. It also involves a deep examination of a company’s contracts and lease agreements, details of real estate (deeds mortgages, mortgages, title policies and use permits) as well as the history of sales and purchases. This information must be compared to similar companies to get an idea of the size of the company and its potential growth.

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