Due diligence is a vital element of making informed decisions, especially in the case of a major transaction like a merger acquisition. The process involves investigating and evaluating the various aspects of the company, venture or entity being considered to ensure that all parties understand the risks that are involved. Due diligence may be operational, financial or legal.
Financial due diligence involves looking at the financial health of a business by examining profit and loss statements, balance sheets, and other documents. This helps stakeholders understand possible risks and determine if the company is an appropriate fit for their investment. Operational due diligence examines the quality of management technology, IT systems, as well as production capabilities. This may uncover hidden risks and liabilities that might not have been disclosed by financial records.
Legal due diligence is the review of all legal documents, including contracts, license agreements, lawsuits pending and other legal documents. This may reveal potential legal risks and liabilities and help ensure that the business adheres to all legal requirements.
Sustainability due diligence is becoming increasingly important as consumers and employees require companies to stand up on green issues, such as carbon neutrality. This kind of due diligence can reveal a range of issues that have to be addressed, ranging from how a business manages its environmental impact to how it handles recycling and other sustainable practices.