Due diligence is an intense investigative process carried out before making major business decisions like mergers, acquisitions, and investments. It involves a thorough analysis of all aspects of the company’s operations to evaluate the company’s assets, liabilities, and overall financial health. It also checks for legal risks and compliance. M&A deals that fail are often the result of incomplete or inaccurate investigations.
There are a variety of kinds of due diligence, and each has its own set of requirements. The primary goal of due diligence is to uncover any problems that could jeopardize the transaction or increase post-transaction risk. To achieve this, it’s essential to have a variety of resources for conducting the investigation. This can include paid online information services, databases for specialists and search engines that are free.
There are two major categories of due diligence, soft and hard. Hard due diligence is founded on data and numbers like audited financial records, profit and loss statements, budgets, balance sheets and projections. It also involves a thorough dive into a company’s contracts and lease agreements, real estate specifics (deeds, mortgages, title policies and use permits) as well as the history of sales and purchases. This information must be compared with similar companies to determine the size of the business and its growth potential.