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The type of due diligence required differs by the company, industry and the complexity of the deal. Its goal is to uncover any issues that are not anticipated and could impact negatively the deal and the interests of the parties.
During due diligence on financials, a buyer scrutinizes the financial records of the company that they are interested in, including the accuracy of figures presented in the Confidentiality Information Memorandum (CIM). It also explores the assets of the target company — checking inventory and fixed assets(opens in a new tab) like machinery, vehicles and office furniture based on appraisals licenses, permits survey, mortgages, and leases. Additionally, a buyer conducts an in-depth analysis of a target’s paid expenses(opens in a new tab) as well as deferred expense(opens in a new tab) and receivables(opens in a new tab).
Operational due diligence(opens in new tab) is the process of analyzing a company’s organization’s culture, business model and leadership. This includes assessing whether the company is well-positioned for success in its chosen market and the quality of its brand. It also evaluates the company’s capacity to meet profits and revenue targets. Additionally operational due diligence entails looking into a target’s human resource policies and organisational structure to assess employee-related risks like severance packages, golden parachutes(opens in a new tab).
Risk assessment is the backbone of due diligence. It covers financial and legal risks, as well reputational issues that may arise from the deal. A thorough due diligence process is able to identify and eliminates these risks, which ensures the success of a deal.