Due diligence is an investigative procedure that is performed prior to making important business decisions like mergers, acquisitions, or investments. It involves a thorough assessment of the business’s assets, liabilities, and overall financial health. It also evaluates legal risks and compliance. M&A deals that fail often are due to inadequate or inaccurate investigations.
There are various kinds of due diligence and each one has its own set of requirements. However, the primary goal is to discover potential issues that could sabotage the transaction or increase the risk after a transaction. It is vital to have a variety of resources to conduct research. This can include paid online information services, specialist databases and search engines that are free.
There are two kinds of due diligence: soft and hard. Hard due diligence focuses on data and numbers that are audited, like looking over financial statements including profit and loss accounts in addition to balance sheets, projections and budgets. 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 sales and purchase history. This data should be compared with similar companies to determine the size of the company and its potential growth.
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