A due diligence procedure is an essential element of making informed decisions, especially prior to a major transaction like a merger or acquisition. The procedure involves analyzing and examining the various aspects of a business or venture to ensure that both parties are aware of the potential risks that are involved. Due diligence could be financial, operational, legal or environmental.
Financial due diligence is the process of assessing the financial health of a business through a review of its profit and loss statements and balance sheets. This allows stakeholders to identify potential risks and determine whether the company is a good fit for their investment. Operational due-diligence checks the quality and capabilities of management, IT systems, as well as production. This may uncover hidden risks and liabilities that might not have been revealed in financial reports.
Legal due diligence is the study of all legal documents, such as contracts, license agreements, lawsuits pending and other legal documents. This may reveal the potential legal risks and liabilities and also ensure that the business is in compliance with all legal requirements.
Sustainability due diligence is becoming more important as both workers and consumers demand companies take a stand on green issues like carbon neutrality. Due diligence can uncover a range of issues, such as how a company handles their environmental impact, or how they manage recycling and other sustainable practices.