The type of due diligence required differs according to the industry, company and complexity of the deal. Its purpose is to discover unforeseen issues before they can adversely affect the transaction and the parties’ interests.
During financial due diligence buyers scrutinize a target company’s financial records and also the accuracy of the numbers showcased in the Confidentiality Information Memorandum (CIM). It also explores the target’s assets — checking inventory and fixed assets(opens in new tab) like vehicles, machinery and office furniture, based on appraisals licenses, permits survey, mortgages, and leases. In addition, buyers conduct an extensive analysis of a target’s paid expenses(opens in a new tab) as well as deferred expense(opens in new tab) and receivables(opens in new tab).
Operational Due Diligence(opens in a new tab) involves analysing the business model, culture, and leadership of a business. This includes assessing a company’s capacity to thrive within its market and the strength of go now its brand. It also evaluates a company’s capability to meet goals for 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 packages and golden parachutes(opens in a new tab).
Risk assessment is the basis of due diligence. It covers potential legal and financial risk, as well as reputational issues that could arise from the transaction. A thorough due diligence process identifies these risks and mitigates them, ensuring that the deal is successful.
