Types of Due Diligence

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Due diligence is a vital step to assess risks and make informed decisions, whether you’re purchasing a property, buying an enterprise, or hiring a new employee. Due diligence comes in many forms and each with its own emphasis on legalities, concrete numbers, and other elements.

Hard due diligence, on the other one hand, is concerned about the data and numbers in financial statements. This may include the examination of accounting records, and the use of financial ratios, and projections of future Cash Flows. Also, it examines sales history, capital expenditure and inventory. Cross-referencing and verifying the documents is a great way to ensure that the information is correct. This can be accomplished by experts.

Operational due-diligence involves a thorough study of a company’s structure, including its management structure, legal issues, and potential growth. It examines the current state of an organization and determines whether it is in alignment with the strategic goals of a potential acquirer. This type of due diligence also looks at any potential risks, such as the impact a sale might impact employees and customers.

Legal due diligence entails examining contracts or licensing, as well as the legal history to ensure that a firm is in compliance with the law and not at risk. This type of due diligence is best performed by an outside law firm or lawyer(opens in a new tab). This will prevent buyers from discovering information that could derail the transaction or cause unexpected liabilities after the transaction is concluded.