Due diligence is an essential element in making informed decisions particularly prior to a major transaction like the merger or acquisition. The process involves assessing and investigating various aspects of an organization or venture to ensure that both parties are aware of the potential risks involved. There are many types of due diligence that include financial, operational as well as environmental, legal and many more.
Financial due diligence is the process of evaluating the financial health of a company by looking over its profit and loss statements as well as balance sheets. This allows stakeholders to identify the potential risks and decide if the company is suitable for their investment. Operational due diligence examines the performance and capabilities of management IT systems, management, as well as production. This can reveal hidden risks and liabilities that may not be disclosed by financial records.
Legal due diligence is the examination of everything legal including contracts, licensing agreements in the midst of litigation, other legal documents. This could reveal potential legal risks and liabilities, as well as ensure that the company is adhering to all legal requirements.
Sustainability due diligence is becoming more important as both workers and consumers insist that companies stand on green issues like carbon neutrality. Due diligence can reveal a variety of issues, for instance the way a company handles their environmental footprint or how they manage recycling and other sustainable practices.
