The Different Types of Due Diligence

Due diligence is an investigative process that is carried out prior to making important business decisions, such as mergers, acquisitions, or investments. It involves a thorough examination of the business’s assets, liabilities and overall financial health. It also examines legal risks and compliance. Incorrect or inadequate investigation is among the main reasons for M&A deal failures.

Due diligence comes in a variety of forms each with specific requirements. The primary purpose of due diligence is to discover any issues that could sabotage the transaction or increase post-transaction risk. To achieve this, it’s important to have a range of sources to conduct investigation. This could include paid online information services, databases designed for specific purposes and search engines for free.

There are two major categories of due diligence: soft and hard. Hard due diligence focuses on data and numbers like reviewing audited financial statements such as profit and loss statements in addition to balance sheets, projections and budgets. It also involves an in-depth examination of the lease agreements of a company or contracts, as well as details related to real estate (deeds and mortgages as well as title insurance and use permits) and transactions and purchase history. This information should be compared with similar companies to get an idea of the company’s size and potential for growth.

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