When you’re thinking about making a major investment or entering into an agreement with a different company due diligence is vital. It will assist you in avoiding costly mistakes, or give you a better negotiation position when it’s time to negotiate the terms of an agreement. But identifying flaws and risks does not mean that you need to call off a deal entirely even if the issue can be overcome with the proper approach.
In the context of business and legal the term “due diligence” was originally a reference to the level of care an honest person would exercise when examining important future issues. This investigation would focus on issues that could affect the future, such as mergers and acquisitions, or investing in an offer to buy shares. The brokerage industry swiftly adopted the practice of due diligence as an established procedure. Broker-dealers performing due diligence on an equity offering of a company were required take a thorough look at the company and report their findings.
Due diligence can be classified into different types
There are five key types of due diligence: commercial, financial environmental, intellectual property, and cyber. While each of these areas might require their own specialist team the most effective due diligence programmes maintain an element of close cooperation. The work done in one area could be a source of information for the checks performed in another.
For instance the process of financial due diligence usually concentrates on ensuring that the projections showcased in the Confidentiality Information Memorandums are accurate. This requires a thorough review of all financial data and reports which includes but is not limited to audited or unaudited financial statements, past and present budgets, cash flows, capital expenditure plans, and inventory.