Featured Image Caption: Types of Due Diligence

Due diligence process is a way for a potential buyer to analyse critical aspects of your business to vet it for any potential risks or concerns before any mergers or acquisitions.

There are mainly five main types of due diligence processes,

  1. Business Due Diligence
  2. Accounting Due Diligence
  3. Legal Due Diligence
  4. IT Due Diligence
  5. Environmental Due Diligence

In this section, we will be going into each of these types.

  • Business Due diligence

This process involves the analysis of your company’s finances. Both, the current and prospects of your company is considered to determine whether or not the cash flow is sustainable in the long term and has the potential to grow.

  • Accounting Due diligence

This part of the process focuses on the accuracy of the financial information provided by you. This may involve quality of earnings report, usually done by an accountant. Depending on the situation, a Tax Due diligence team may also be required.

  • Legal Due diligence

The legal aspects of your business will be inspected where lawyers may look into any current contracts with providers and check for potential liabilities.

  • IT Due Diligence

IT professionals may be brought in at this stage to check for security risks, downtime problems, and so on so that they can be resolved by the time the deal is finalized.

  • Environmental Due Diligence

The specifics of this phase may vary on the type of industry and involves the checking of any potential environmental risks that may be involved in acquiring your company.

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The steps involved

There are generally some steps and measures a company has to take before they finalize a deal. An understanding of the Due Diligence process and its actions will help to navigate this.

Know who is involved

The people that may be involved in the due diligence process are,

  • The investors
  • The investor’s lawyers
  • The investor’s accountants
  • Professional consultants
  • Outside service providers depending on the industry

Each step of the Due diligence process involves the participation of these professionals at different stages and provides the buyer with specific information.

Know what may be asked

To assure the buyer of the safety of the investment, you may be asked for the following information,

  • Corporate records
  • Stockpile information
  • IP contracts
  • History of Litigation
  • Information concerning insurance
  • Information concerning regulations
  • Information concerning finances and leases

After the conclusion of the Due Diligence process, the team will finalize a report and sent it to the buyer. The report usually contains a summary of all problems or issues that may have been discovered.

The report may conclude in one of three ways,

  • The deal is sound profitable
  • The deal may need adjustment based on the findings by the team
  • The deal is a poor investment and is recommended to be abandoned
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The processes involved in Due Diligence are aimed to root out any potential risks or red flags for the sake of the buyer. It can be a long and drawn out process but knowing what is involved and why it is so will help make it go a lot faster and smoother.

By Shashi Ranjan
who is a talented and experienced digital marketing professional and also a prolific blogger.


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