The type of due diligence required varies by the company, industry and the complexity of the deal. Its objective is to find any unanticipated issues that could negatively impact the deal and the interests of all parties.

During due diligence on financials an investor scrutinizes a target company’s financial records and the accuracy of the numbers displayed in the Confidentiality Memorandum (CIM). The buyer also examines the assets of the target company — verifying inventory and fixed assets(opens in a new tab) like vehicles, machinery and office furniture, based on appraisals licenses, permits surveys, mortgages and leases. In addition, buyers conduct an extensive analysis of a target’s paid expenses(opens in a new tab) and deferred expense(opens in new tab) and receivables(opens in new tab).

Operational Due Diligence(opens in a new tab) is the process of analyzing the business model as well as the culture, leadership, and management of a company. This includes assessing the company’s capacity to thrive within its market and the strength its brand. It also assesses a company’s capacity to achieve targets for profit and revenue. Operational due diligence includes reviewing a target’s HR policies and organisational structures to assess employee-related risks, including golden parachutes and severance packages(opens in a new tab).

Risk assessment is the core of due diligence. It covers financial and legal risks, as well as issues with reputation that may arise from the deal. A thorough due diligence process identifies these risks and mitigates them, thus ensuring that a deal is successful.

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