Types of Due Diligence
Due diligence is a vital process to determine the risks and make informed decisions, whether you’re purchasing the property of a business, or bringing on an employee who is new. There are a variety of kinds of due diligence, that differ in their emphasis on specific numbers, legalities and other factors.
Hard due diligence, on the other side, is concerned with the data and numbers contained in financial statements. This can include analyzing accounting records using financial ratios, and projections of cash flows to the future. It also analyzes inventory, capital expenditure and sales histories. It is essential to verify the accuracy of this information by cross-referencing it and checking documents, which is often performed by experts from outside.
Operational due-diligence is an in-depth investigation of a company, including its management structure, legal issues and the potential for growth. It evaluates the current state of a business and evaluates whether it aligns with an acquirer’s strategic goals. This type of due diligence also looks at the possibility of problems, including the impact that a sale may have on existing employees and customers.
Legal due diligence entails examining contracts as well as licensing and legal history to make sure that a business is in compliance with legal requirements and is not at risk. This type of due diligence should be performed by an outside law firm or lawyer(opens in a new tab). This prevents buyers from discovering details that could disrupt the deal or result in unexpected liabilities after the transaction is completed.