Due diligence is a vital element in making informed decisions, especially before a major transaction like the merger or acquisition. The procedure involves looking into and analyzing various aspects of a company, venture, or entity to ensure that both parties are aware of the risks that are involved. Due diligence may be operational, financial or legal.
Financial due diligence is the process of assessing a company’s financial health by examining its profit and loss statements as well as balance sheets. This helps stakeholders understand the potential risks and decide if the company is an appropriate fit for their investment. Operational due diligence evaluates the management’s performance IT systems, management systems, and production capabilities. This may uncover hidden risks and liabilities which may not be disclosed through financial records.
Legal due diligence involves an examination of all things legal including contracts, licensing agreements as well as pending litigation and other legal documents. This could uncover potential legal liabilities and risks, as well as ensure that the business is in compliance with all legal requirements.
Due diligence on sustainability is becoming more important as consumers and employees demand that companies adopt positions on green issues like carbon neutrality. This type of due diligence can uncover a wide range of issues that must be addressed, from how a company handles its environmental footprint to the way it handles recycling and other sustainable practices.
