At some point in your journey around the world of business, you may or may not have stumbled on the term, “Due Diligence.” If you haven’t, then this post is timely as it will unravel every aspect of the term you should know. However, if you have, then you’d agree with me that there’s a huge difference between stumbling on some vague term in business and actually knowing it. Either way, you can’t successfully run a business with just a vague idea of the term “due diligence”. You need to cover every aspect, starting with the fundamentals. Basically, this starts with the meaning of due diligence and then goes deeper into its types, examples, processes and so on. <\/p>\n\n\n\n
However, for the purpose of easy assimilation, we will focus on just two aspects of the term. These would be the types and examples of due diligence; with, of course, the meaning of due diligence. <\/p>\n\n\n\n
In simple terms, due diligence is the systematic review of a company prior to an event. Examples of such events could be mergers or acquisitions, capital raises, initial public offerings (IPO), or audits. Furthermore, it is the investigative process that takes place prior to a financial transaction. Oten times, the aim is to determine commercial and legal risks and opportunities.<\/p>\n\n\n\n
Due diligence before purchasing entails a thorough examination of a company’s vital documents and records in all areas of its operations. You must always go through this prior to the signing of a binding agreement between the parties to ensure that all uncertainties have been disclosed and all opportunities have been considered before the M&A transaction continues.<\/p>\n\n\n\n
With the meaning and importance of due diligence in place, let’s move into the next phase. This talks about the several types of due diligence. <\/p>\n\n\n\n
Let’s pump the brakes here. Before we go any further, you may want to find out for sure if you should be really be reading this. And how do you go about that? Well, this part’s really simple. Just find out who exactly is involved in the due diligence process. <\/p>\n\n\n\n
For the most part some of them include; <\/p>\n\n\n\n
Moving on, the following are some types of due diligence. However, since the process varies by sector and event or transaction form, this is not an exhaustive list. In any case, it is a reasonable starting point for understanding the depth of evaluation in play.<\/p>\n\n\n\n
One of the most significant types is financial due diligence. It aims to verify a company’s financials by conducting an in-depth review of its financials. This includes financial statements, balance sheets, sales forecasts, capital structure, debt, and other documents. Also, a financial audit also necessitates the use of financial DD.<\/p>\n\n\n\n
The goal, however, is to determine the company’s past and present financial results as well as future profit margins. It will also determine if the revenue projections are fair. <\/p>\n\n\n\n
Accountants or a financial consulting team will typically do this job.<\/p>\n\n\n\n
This type of due diligence is also pretty important. Reason being that it investigates any legal problems or threats that the acquirer should be aware of. Basically, anything that could pose a threat to the transaction now or in the future. <\/p>\n\n\n\n
Legal due diligence plays a significant role in contract negotiations and in determining an appropriate value on which all parties can consent. In the same vein, Lawyers who perform legal due diligence play important roles on both buy-side and sell-side deal teams.<\/p>\n\n\n\n
Some of the documents that undergo scrutiny in this type of due diligence include the following; <\/p>\n\n\n\n
This procedure is to ensure that the purchase will not cause any potential legal issues.<\/p>\n\n\n\n
Tax due diligence is a detailed examination of all the various forms of taxes that may be levied on a corporation, as well as the tax laws that the business may be subject to in a specific jurisdiction. It addresses all tax-related concerns and documents, including income taxes, property taxes, payroll and job taxes, sales taxes, and more.<\/p>\n\n\n\n
Operational due diligence helps to gain a thorough understanding of a target company’s functional activities. It involves a summary of the target’s business strategy and operating infrastructure, as well as an examination of opportunities to add value by enhancing the operational function.<\/p>\n\n\n\n
This form is especially important in the manufacturing sector, where supply chain<\/a> and manufacturing operations are crucial. Oftentimes, a third-party consultant or professional services company oversees these procedures.<\/p>\n\n\n\n The examination of a target company’s intangible assets, such as patents, copyrights, trademarks, and brand names, is known as intellectual property due diligence. Although intellectual property is difficult to measure in monetary terms, it can also account for some of the company’s most valuable assets, making it an important factor.<\/p>\n\n\n\n Although financial due diligence focuses on the target company’s financial health, business due diligence takes into account external factors as well. It considers wider market risks<\/a> and opportunities for the goods or services that the company provides.<\/p>\n\n\n\n Basically, business due diligence considers market size and share, competitors, and opportunity in the prospects for future returns, revenue estimates, and predictions.<\/p>\n\n\n\n It covers the process of validating the acquisition and determining the probability of achieving value in the current economic environment. <\/p>\n\n\n\n#5. Intellectual Property DD<\/strong><\/span><\/h3>\n\n\n\n
#6. Business DD<\/span><\/h3>\n\n\n\n