Types of Due Diligence
A due diligence process is a vital element of making informed decisions, especially prior to major transactions like a merger or acquisition. The process involves assessing and investigating various aspects of an organization, venture, or entity to ensure that both parties are aware of the potential risks involved. There are various types of due diligence, including financial, operational as well as environmental, legal and more.
Financial due diligence is the process of assessing the financial health of a firm by looking over its profits and losses statements and balance sheets. This allows stakeholders identify the potential risks and determine if the company is suitable for their investment. Operational due diligence examines the performance and capabilities of management IT systems, management, as well as production. This may reveal hidden risks and liabilities that may not be disclosed through financial records.
Legal due diligence is the process of examining all legal documents, including license agreements, contracts, in-progress litigation and other legal documents. This may reveal possible legal risks and liabilities, as well as ensure that the company is adhering to all legal requirements.
Due diligence on sustainability is becoming more vital as consumers and employees require that businesses take a stance on green issues such as carbon neutrality. Due diligence can reveal a variety of issues, for instance how a company manages their environmental footprint or how they deal with recycling and other sustainable practices.