Due diligence is an essential step to analyze risks and make informed choices, whether you’re purchasing the property of a company, or hiring a new employee. Due diligence can take a variety of forms, each with a different emphasis on legal issues, concrete numbers and other factors.
Hard due diligence On the other one hand, is concerned about the data and numbers contained in financial statements. This could include the examination of accounting records, and the use of financial ratios, and also projections of cash flows in the future. It also examines capital expenditure, sales history and inventory. It’s important to check the accuracy of this information by cross-referencing and verifying documents, which is often performed by experts from outside.
Operational due-diligence involves a thorough examination of a company including its management structure, legal concerns, and growth potential. It evaluates the current situation of the business and determines if it aligns with an acquirer’s strategic goals. This type of due-diligence also takes into account potential pitfalls such as the impact that a sale may have on existing customers and employees.
Legal due diligence involves examining contracts and licensing agreements, as well as litigation records to ensure that a firm is in compliance with legal requirements and not at risk. This type of due diligence should be performed by an outside law firm or lawyer(opens in a new tab). This will help prevent a buyer from finding out information that could lead to a deal being ruined or unforeseen liabilities after the transaction has been completed.
