What is due diligence?
Due Diligence is a process used to assess the potential of a business transaction. It involves researching, examining and verifying all information related to a potential acquisition or investment before committing to it. Due diligence can be divided into three main categories—financial, legal and operational—and encompasses both internal and external sources of data.
Types of Due Diligence
Legal Due Diligence
Legal due diligence is a key component of business transactions and involves researching the past, present and potential future legal risks associated with a particular transaction. This type of due diligence is typically conducted for mergers, acquisitions and other big-ticket deals.
Commercial Due Diligence
Commercial due diligence is typically used by investors looking for an edge when considering entering into new markets or markets where they lack expertise. This form of due diligence evaluates a target market’s size, growth rate, competitive landscape as well as regulatory environment from a commercial standpoint.
Financial Due Diligence
Financial due diligence is another common form of due diligence which seeks to identify red flags and uncover inconsistencies in financial data provided by companies seeking capital investments or who are going through an acquisition process.
Why due diligence is required?
Due diligence helps to determine businesses if a potential purchase or investment has any hidden risks, such as financial liabilities or environmental contamination. When conducted properly, due diligence can help identify problems before they become too difficult to manage, as well as provide valuable information that cannot be found in purely financial documents. This makes it an invaluable tool for many types of business decisions since it allows for a much more complete understanding of what an individual is investing their money into.