The aim of due diligence is to enhance a user’s understanding of key information underpinning a corporate transaction, allowing parties to make informed investment decisions.
What is due diligence?
Due diligence can be broken down into four broad categories: Commercial, Operational, Legal and Financial. It is an examination of a company's affairs and dealings, typically during preparation for an acquisition, refinancing or restructuring.
Commercial due diligence may include a study of wider market conditions, competitive analysis, or a section investigation
Operational due diligence may include a review of operations systems or processes, HR programmes, management teams, or other non-financial aspects of a business.
Legal due diligence would investigate the legal context and potential risk associated with a business. This may include reviewing the terms of franchising or employment contracts, intellectual property disputes, or property ownership issues.
Financial due diligence involves investigating historical financial data, as well as future performance forecasts and funding needs.
What does it cover?
Determining scope is a key aspect of due diligence. There is a wide range of questions a due diligence project may seek to answer, depending on the user's needs.
How does the company's current debt balance, cash flow, and credit/finance structure look?
Has the target company's performance historically met budget forecasts?
How does the target company expect to perform in the coming years?
Why perform due diligence / When is it necessary?
Due diligence is vital for risk mitigation during any acquisition. Conclusions drawn from due diligence studies can impact not only the final investment decision but also price negotiation and the terms of any agreement reached.