Due diligence is an arduous examination carried out prior to making important business decisions such as mergers, acquisitions and investments. It involves a thorough examination of the business’s assets, liabilities and overall financial health. It also examines legal risks and compliance. M&A deals that fail are often due to inadequate or inaccurate investigations.
There are several kinds of due diligence and each comes with its own unique set of requirements. The main goal of due diligence is to find any potential issues that could undermine the deal or increase the risk of a post-transaction. It is essential to have a range of resources to conduct your research. This can include free search engines, paid online information services and databases that specialize in.
There are two major categories of due diligence, namely soft and hard. Hard due diligence is built on numbers and data like audited financial reports such as profit and loss reports in balance sheets, budgets, and projections. It also involves a deep dive into a company’s contracts and lease agreements, real estate specifics (deeds mortgages, use permits and title policies), and purchase and sales history. It’s crucial to evaluate this information against similar companies in the field to gauge the size of the company as well as potential growth.