Due diligence is an investigational process that is carried out prior to making major business decisions such as mergers, acquisitions, and investments. It is a thorough review of various aspects of the company’s operations to determine the business’s assets, liabilities and overall financial health. It also evaluates legal risks and compliance. M&A deals which fail are often the result of inadequate or inaccurate investigations.
Due diligence comes in many forms and each has specific requirements. However, the principal goal is to find potential problems which could hinder a deal or increase risk post-transaction. To achieve this, it’s essential to have a variety of sources to conduct investigation. This can include free search engines as well as paid online information services and specialist databases.
There are two major categories of due diligence, namely soft and hard. Hard due diligence focuses on numbers and data that are audited, like looking over financial statements, profit and loss reports and balance sheets, as well as projections and budgets. It also entails a deep examination of a company’s contracts and lease agreements, real estate specifics (deeds, mortgages, title policies and use permits) and sales and purchase history. This information must be compared with similar companies to determine the company’s size and growth potential.