Due diligence is a crucial element of making a well-informed decision, especially before a significant transaction like a merger acquisition. The process involves analyzing and investigating the various aspects of a business, venture, or entity to ensure that both parties are aware of the risks involved. There are many types of due diligence, including operational, financial as well as environmental, legal and many more.
Financial due diligence is the process of evaluating a company’s financial health through a review of its profits and losses statements and balance sheets. This enables stakeholders to spot the potential risks and decide if the company is an appropriate fit for their investment. Operational due-diligence checks the quality and capabilities of management IT systems, management, and production systems. This may reveal hidden risks and liabilities that may not have been revealed in financial reports.
Legal due diligence is the study of all legal documents, such as contracts, license agreements, in-progress litigation and other legal documents. This could uncover potential legal liabilities and risks and also ensure that the business is in compliance with all legal requirements.
Sustainability due diligence is becoming more crucial as workers and consumers demand companies take a stand on green issues, including carbon neutrality. Due diligence can reveal a range of issues that require to be addressed, ranging from how a company handles its environmental impact to how it handles recycling and other sustainable practices.