Due diligence is a vital component of making educated decisions especially prior to any major transaction such as the merger or acquisition. The process involves analyzing and investigating the various aspects of a business, venture, or entity to ensure that both parties are aware of the potential risks involved. Due diligence may be financial, operational, legal or environmental.
Financial due diligence is the process of assessing the financial health of a firm by reviewing its statement of profits and losses and balance sheets. This allows stakeholders identify possible risks and determine whether the business is suitable for their investment. Operational due-diligence examines the quality and capabilities of management and IT systems as well as production. This may uncover hidden risks and liabilities which might not have been disclosed by financial records.
Legal due diligence involves the examination of all legal documents, including contracts, license agreements, pending litigation and other legal documents. This could uncover potential legal risks and liabilities as well as verify that the company adheres all legal requirements.
Sustainability due diligence is becoming more important as consumers and workers insist that companies stand on environmental issues, like carbon neutrality. This type of due diligence can reveal a range of issues that must be addressed, ranging from how a business manages its environmental footprint to how it handles recycling and other sustainable practices.
