The kind of due diligence required varies according to the industry, company and the nature of the deal. Its goal is to identify problems that are not apparent before they adversely affect the transaction and the parties’ interests.
During due diligence, the buyer reviews the financial records of the target company, including the Data Room accuracy and completeness of the numbers in the Confidentiality Information Memorandum (CIM). The buyer also scrutinizes the target’s fixed assets (opens in new tab) which include vehicles as well as machinery and office furniture, using appraisals and other documents. A buyer also conducts a thorough analysis of a target’s pre-paid expenses(opens in new tab) and deferred expense(opens in a new tab) and receivables(opens in new tab).
Operational Due Diligence(opens in a new tab) includes analysing the business model and culture, as well as the leadership of a company. This includes assessing a business’s capacity to thrive within its market and the strength its brand. It also evaluates the company’s capacity to meet the goals of profit and revenue. Additionally, operational due diligence includes looking into a target’s human resource policies and organisational structure to determine risks posed by employees like severance plans and golden parachutes(opens in new tab).
Risk assessment is the backbone of a due diligence process. It includes potential financial and legal risks, as well as reputational concerns that could arise from the transaction. A thorough due diligence process uncovers these risks and reduces them, ensuring that the deal is successful.
