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Due diligence is an investigational process that is carried out prior to making business decisions like mergers, acquisitions, or investments. It involves a thorough assessment of the business’s assets, liabilities and overall financial health. It also examines legal risks and compliance. Incorrect or inadequate investigations are one of the major reasons behind M&A deal failures.
There are several types of due diligence, and each one has its own set of requirements. The primary purpose of due diligence is to find any issues that could hinder the transaction or increase post-transaction risk. To achieve this, it’s important to have a variety of resources for conducting the research. This can include paid online information services, databases for specialists and search engines that are free.
There are two kinds of due diligence: hard and soft. Hard due diligence is focused on numbers and data and includes reviewing audited financial statements such as profit and loss statements including balance sheets, budgets and projections. It also involves a deep investigation of a company’s contract and lease agreements, real estate information (deeds, mortgages, title policies and use permits) and transactions and purchases. It is crucial to compare these data with similar companies in the industry to get a feel for the size of the business and its potential growth.
