Due Diligence is the process of investigating, analyzing, or researching carefully and thoroughly, especially in matters which involve substantial obligations or liabilities before an individual or entity proceeds with any kind of transaction, agreement, arrangement or decision.
Due diligence must be conducted in order to collect appropriate data about the options available, as well as possible disadvantages and advantages of each decision. This is a typical feature of mergers and acquisitions, investment, partners, property transactions and others.
The nature of the transaction or decision governs the extent of due diligence that can be undertaken. This normally entails a review of the company’s financial records, legal documents, operational procedures, managerial strategies among others that relate to the issue in concern. This is done with an aim of discovering any possible risks, liabilities and unknown damages that would influence the decision making.
It is important to carry out due diligence to reduce risks and ensure that buyers, users and contractors understand what they are getting themselves into. It gives the full picture by helping the parties reach a final decision to ensure that they can decide on the basis of such negotiation, identifying possible risks, and avoiding surprises along the way.
Types of Due Diligence –
Due diligence is an extensive examination of a business which involves research and evaluation. However, there are several categories of due diligence adapted for different situations. Here are some common types:
1. Financial Due Diligence:
• Takes into account the financial side of the business.
• This includes looking into the financial statements, management of accounts, cash flow and forecasts.
• This is an audit objective that intends to detect any financial anomalies such as risk, liability and irregularity.
2. Legal Due Diligence:
• It is essentially lawful in nature.
• A contractual due diligence involves the evaluation of contracts, agreements, litigation history, intellectual property, regulatory compliance, and other legal documents with the help of a due diligence lawyers in Perth.
• Assists in locating possible legal threats and obligations.
3. Commercial Due Diligence:
• Provides a picture of the market and industry within which the firm is located.
• The evaluation of the competitive environment, prevailing trends, target consumers, and prospects for growth.
• Determine where and how the firm stands in the market.
4. Operational Due Diligence:
• The day-to-day activities involved in running a business are referred to as operations.
• Consists of a study of the firm’s internal operations, workflow arrangement, and leaders.
• It identifies operational redundancies, gaps and weaknesses.
5. Environmental Due Diligence:
• Evaluate the environmental implications and compliance of a business.
• Assessment of environmental hazards, possible law suits against them and compliance with laws and regulations regarding environment.
6. IT Due Diligence:
• It aims at the business’s IT infrastructure.
• This includes analysis of technology systems used, cyber security mechanisms in place, and data/IT asset management procedures.
• It aims to identify possible IT risks that may expose vulnerabilities.
7. Human Resources Due Diligence:
• An analysis of a business’s human resources and workforce.
• This process entails scrutiny of employment contracts, employees’ benefits, workplace environment and liability issues.
• It aims to establish any potential HR risks.
8. Regulatory Due Diligence:
• Deals with adherence to existing federal and statutory requirements.
• It entails scrutiny of regulatory filings, permits and compliance with industrial specification regulations.
• It aims at identifying any regulatory risks or non-compliance issues
9. Cultural Due Diligence:
• Looks at how a particular business is organized.
• Considers values, ethical issues and workplace atmosphere.
• The objective is to point out possible cultural similarities and dissimilarities as well as the possibility of integration issues, in the case of amalgamation.
10. Tax Due Diligence:
• Taxation implications for a business or a transaction.
• The process is one of a tax return audit that may include an examination of tax liabilities as well as tax benefits or risks.
Depending upon the nature of the transaction or investment, these due diligence types will be carried out together. In the case of due diligence, one needs to tailor their strategy depending on prevailing situations.
