Due Diligence

Due diligence serves as an important component to any business transaction or financial transaction. It promotes business transparency, provides a means of documenting risks associated with a transaction and creates an accurate picture of the overall target company or investment. When due diligence is properly conducted on a company's financial records, it confirms the legal compliance of the company, evaluates the company's operational capabilities and determines the company's current market status. As a result, the process of due diligence provides a means for a business, purchaser or partner to make an informed decision based on the full knowledge of all relevant facts and figures.

• Financial Due Diligence: Financial Due Diligence looks at the company's financial health. The financials include balance sheet, P&L accounts, cash flow statements, debt levels, key financial ratios, etc. Financial Due Diligence verifies that the numbers generated by management are accurate, and it identifies financial irregularities and business sustainability concerns.
• Legal Due Diligence: Legal Due Diligence examines whether or not a business is compliant with all applicable laws and regulations. Legal Due Diligence includes an assessment of the company's litigation history, contracts, intellectual property rights, licences, regulatory filings, corporate governance and whether or not a business has resolved potential disputes with its business partners (buyers/sellers). Legal Due Diligence demonstrates to potential buyers that the company is in good legal standing and has no pending legal disputes.
• Commercial Due Diligence: Commercial Due Diligence assesses the competitive environment, customer base, supply chain, and future growth potential for a business. A successful commercial Due Diligence confirms that a business is well positioned within its market and will continue to thrive long after closing.
• Tax Due Diligence: Tax Due Diligence reviews a company's tax compliance, including tax filing history, tax obligations, and any outstanding tax disputes. Tax Due Diligence will also identify any potential tax saving opportunities, such as the use of tax credits, that would be available to a new owner after closing.
• Hard vs. Soft Due Diligence: Hard Due Diligence includes the analysis of data, numbers, and legal documents; it contains a company's financial statements, revenue projections and operational metrics. On the other hand, soft Due Diligence assesses the management team, employee morale, and culture of the company as well as its suppliers, customers and competitors. Thus hard Due Diligence provides concrete evidence that a business is solvent while soft provides potential problems that could hinder a successful sale.

The process is usually broken down into components that allow for an organized way of assessing an organization or potential investment. The due diligence process often involves reviewing financial records, legal documents, analyzing market/industry information and competitors, evaluating management capabilities, analyzing operational efficiencies and risk exposure, validating past performance/history and establishing projections for future growth, assessing any/all possible liabilities, pending litigation, and regulatory issues.

For example investors typically review historical stock price performance over time, calculate financial ratios to determine fair value, evaluate potential share dilution, and consider what analysts' estimates are for the company/market as a whole.