Due diligence is an investigational procedure that is conducted prior to making business decisions such as mergers, acquisitions, or investments. It involves a thorough examination of the business’s assets, liabilities and overall financial health. It also evaluates legal risks and compliance. M&A deals that fail are usually the result of inadequate or incorrect investigations.
There are a variety of types of due diligence, and each comes with its own set of requirements. However, the principal goal is to find potential problems which could hinder the transaction or increase the risk after a transaction. To accomplish this, you must have a range of resources to conduct the study. This could include paid online information services, databases designed for specific purposes and free search engines.
There are two main types of due diligence, soft and hard. Hard due diligence is dependent on numbers and information like audited financial records, profit and loss statements in budgets, balance sheets, and projections. It also involves the deep dive into the lease agreements of a company contracts, lease agreements, and details related to real estate (deeds and mortgages as well as title insurance and use permits), as well as transactions and purchase history. This data should be compared to similar companies to get an idea of the size of the company and its growth potential.
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