Types of Due Diligence

The kind of due diligence required varies according to the industry, company and the amount of work involved. Its objective is to find any potential issues that may negatively affect the transaction and the interests of both parties.

During due diligence, buyers examine go now the financial records of the target company, focusing on the accuracy and completeness of the numbers in the Confidentiality Information Memorandum (CIM). It also analyzes the assets of the target company — verifying inventory and fixed assets(opens in a new tab) like vehicles, machinery and office furniture based on appraisals, licenses, permits surveys, mortgages and leases. Buyers will also conduct an extensive analysis of a target’s deferred expenses (opens in new tab), expenses that are prepaid (opens a new tab) and receivables (opens an entirely new tab).

Operational Due Diligence(opens in an entirely new tab) involves analyzing the business model, culture, and leadership of a company. This includes assessing a business’s ability to succeed in its industry and the strength its brand. It also evaluates the company’s ability to achieve the goals of profit and revenue. Additionally, operational due diligence includes looking into a target’s human resource policies and organizational structure to determine the risk of employees such as severance package and golden parachutes(opens in new tab).

Risk assessment is the basis of due diligence. It involves potential financial and legal risk, as well reputational issues that may arise from the deal. A thorough due diligence procedure identifies these risks and mitigates them, thus ensuring that a deal is successful.

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