Types of Due Diligence
A due diligence procedure is an essential element of making informed decisions, particularly prior to a major transaction like a merger or acquisition. The process involves analyzing and assessing various aspects of the venture or entity to ensure that all parties are aware of the risks that are involved. There are various types of due diligence that include financial, operational environmental, legal and many more.
Financial due diligence is the process of assessing the financial health of a firm by looking over its profit and loss statements and balance sheets. This helps stakeholders identify the potential risks and decide if the company is suitable for their investment. Operational due-diligence checks the quality and capabilities of management and IT systems and production systems. This can uncover hidden risks and liabilities that might not have been disclosed in financial reports.
Legal due diligence involves an examination of everything legal including license agreements, contracts, pending litigation, and other legal documents. This can reveal any legal risks and liabilities, while also making sure that the company is adhering to all legal requirements.
Due diligence in pursuing sustainability is becoming more crucial as consumers and employees demand that companies adopt an environmental stance such as carbon neutrality. Due diligence can reveal a myriad of issues that need to be addressed, from how a business manages its environmental footprint to the way it handles recycling, and other sustainable practices.
