Due diligence is crucial, whether you are considering making an investment that is significant or entering into an agreement with another company. It will assist you in avoiding costly mistakes or make you more confident in your bargaining position when it’s time to make a decision on the terms of an agreement. However, identifying potential risks and flaws doesn’t mean you have to stop a deal in its entirety, especially if the problems can be solved with the right method.
In the business and legal world, “due diligence”, initially, was a reference to the amount of care a reasonable individual would take when examining important future issues. This investigation would focus on issues that could influence the future, such as mergers and acquisitions or investing in stock offerings. Due diligence became a common practice in the brokerage industry. Broker-dealers who conducted due diligence on equity offerings of a company were required conduct a thorough investigation of the company and publish their findings.
Types of due diligence
There are five main types of due diligence: commercial, financial environmental, intellectual property and cyber. The best due diligence programs maintain a close working relationship between these various areas, even though each one may require the services of its own specialists. The work done in one area can be a source of information for the checks performed in a different one.
For example financial due diligence typically concentrates on ensuring projections in the Confidentiality Information Memorandums are accurate. This requires a thorough inspection of all financial information and reporting systems, including but not limited to audited as well as non-audited financial statements, the past and current cash flows, budgets, capital expenditure plans and inventory.