Due diligence is an intense investigation process that is conducted prior to making major business decisions like mergers, acquisitions and investments. It involves a thorough examination of the company’s assets, liabilities, and overall financial health. It also evaluates legal risks and compliance. Incorrect or incomplete investigations are one of the main reasons for M&A deal failures.
There are various kinds of due diligence and each one has its own unique set of requirements. The primary objective is to identify potential issues that might sabotage the transaction or increase risk post-transaction. To accomplish this, it’s crucial to have a variety of sources to conduct research. This can include paid online information services, databases designed for specific purposes and search engines for free.
There are two kinds of due diligence: soft and hard. Hard due diligence is founded on data and numbers like audited financial records such as profit and loss reports in budgets, balance sheets and projections. It also includes a deep look at a company’s contracts and lease agreements, real estate details (deeds, mortgages, use permits and title policies) as well as purchase and sales history. It’s crucial to compare this information with similar companies in the same industry to gauge the size of the business and its growth prospects.