A due diligence procedure is a crucial element of making a well-informed decision, especially prior to a major transaction such as types of due diligence a merger acquisition. The process involves researching and evaluating various aspects of the venture, company or entity being considered to ensure that all parties understand the risks that are involved. Due diligence could be operational, financial, legal or environmental.
Financial due diligence is the process of assessing the financial health of a company through a review of its profits and losses statements and balance sheets. This allows stakeholders identify possible risks and determine if the company is suitable for their investment. Operational due-diligence examines the quality and capabilities of management and IT systems and production systems. This could reveal hidden risks and liabilities that might not have been identified by financial records.
Legal due diligence involves the process of examining all legal documents, such as license agreements, contracts, lawsuits pending and other legal documents. This can reveal any legal risks or liabilities, while also making sure that the company is adhering to all legal requirements.
Sustainability due diligence is becoming more important as both workers and consumers demand companies take a stand on green issues, such as carbon neutrality. Due diligence can reveal a range of issues, including how a company handles their environmental impact or how they manage recycling and other sustainable practices.