The Different Types of Due Diligence

Due diligence is an click to read investigative procedure that is performed prior to making major business decisions such as mergers, acquisitions, or investments. It is a thorough analysis of the business’s assets, liabilities, and overall financial health. It also examines legal risks and compliance. Incorrect or inadequate investigations are among the major reasons behind M&A deal failures.

There are several kinds of due diligence each with its own set of requirements. The primary goal of due diligence is to identify any issues that could sabotage the transaction or increase the risk post-transaction. To accomplish this, it’s essential to have a variety of resources for conducting the research. This includes paid online information services, databases that specialize in the field and search engines for free.

There are two main categories of due diligence, soft and hard. Hard due diligence is based on numbers and data such as audited financial statements, profit and loss statements as well as budgets, balance sheets and projections. It also involves a thorough investigation of a company’s contract and lease agreements, real estate information (deeds, mortgages, title policies and use permits) and the history of sales and purchases. This information must be compared with similar businesses to determine the company’s size and potential growth.