A due diligence procedure is a vital element of making informed decisions, particularly prior to a major transaction such as a merger or acquisition. The process involves assessing and investigating various aspects of a company, venture, or entity to ensure that both parties are aware of the risks involved. Due diligence could be financial, operational or legal.
Financial due diligence entails examining the financial health of a business through review of profit and loss statements, balance sheets and other documents. This helps stakeholders identify potential risks and determine whether the company is an appropriate fit for their investment. Operational due-diligence checks the quality and capabilities of management and IT systems and production systems. This could reveal hidden risks and liabilities that might not types of due diligence have been identified by financial records.
Legal due diligence is an examination of everything legal, including license agreements, contracts and pending litigation, as well as other legal documents. This could reveal any legal risks and liability, as well as making sure that the business adheres to all legal requirements.
Sustainability due diligence is becoming more important as consumers and workers insist that companies stand on green issues like carbon neutrality. This type of due diligence can uncover a variety of issues that must be addressed, from how a business manages its environmental impact to how it handles recycling and other sustainable practices.