Types of Due Diligence

Due diligence is a key process in a variety of business deals, including mergers and acquisitions (M&A) and venture capital or private equity investments, and initial public offerings. In addition, it’s also an essential requirement for many financial transactions like mortgages and loans. In the process of due diligence, it’s vital that businesses conduct thorough checks to avoid unpleasant surprises after the deal is concluded.

There are numerous types of due diligence, and each requires a specific method of conducting it. Some of the most commonly used kinds of due diligence include:

Examining financial records and documents, such as profit-and-loss reports and balance sheets. Often, this includes the review of contracts related to tangible assets, such as equipment and vehicles. It could also include the examination of a business’s tax situation, to identify potential tax liabilities and opportunities.

Legal due diligence consists of an examination of the firm’s consolidated legal structures, ownership arrangements and current and historical corporate documents. It is crucial to keep in mind any the possibility of litigation pending or upcoming and any settlements or judgments.

The term “Regulatory Due Diligence” refers to the process of assessing the compliance of a potential company with federal laws and regulations. This is particularly important in industries that are heavily controlled like healthcare or finance. This type of due diligence usually includes a review of the company’s permits, licenses, and the history of regulatory compliance. In addition, it might also examine the company’s compliance to industry standards and best practices. It is often necessary to seek the help of experts or advisory firms for this type of due diligence.