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The Different Types of Due Diligence

Due diligence is a rigorous investigation process that is conducted prior to making any major business decision like mergers, acquisitions and investment decisions. It involves a thorough assessment of the company’s assets and liabilities and overall financial health. It also examines legal risks and compliance. M&A deals which fail are often the result of inadequate or inaccurate investigations.

There are a variety of types of due diligence and each one has its own unique set of requirements. The primary goal of due diligence is to discover any issues that could hinder the transaction or increase the risk of a post-transaction. It is vital to have a range of resources available to conduct your research. This includes paid online information services, specialist databases and search engines that are free.

There are two primary categories of due diligence, namely soft and hard. Hard due diligence is dependent on numbers and information such as audited financial statements as well as profit and loss statements and budgets, balance sheets and projections. It also involves the deep dive into lease agreements as well as contracts and details related to real estate (deeds and mortgages, title insurance, and use permits), as well as the purchase and sale histories. This information should be compared to similar companies to determine the size of the business and its potential for growth.

April 30, 2024

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