Due Diligence#
Adequate due diligence is foundational to continuous operations and development.
By definition, due diligence is the process of thoroughly investigating and evaluating a business, individual, or transaction before making a decision or commitment. It is typically conducted to assess risks, confirm details, and ensure that all information provided is accurate and complete.
The aim is always to strike a balance between adequate due diligence and undue due diligence to focus on productivity as suggested by thinkers such a W. Edwards Deming.
Key Aspects of Due Diligence#
Financial Due Diligence: Review of financial statements, tax returns, and cash flow to verify the accuracy of the company’s financial health.
Legal Due Diligence: Assessment of contracts, intellectual property, litigation risks, regulatory compliance, and ownership structures.
Operational Due Diligence: Examination of business operations, including supply chains, production processes, technology, and customer relationships.
Commercial Due Diligence: Analysis of the market conditions, competitive landscape, customer base, and revenue projections.
Environmental Due Diligence: Evaluation of environmental risks and compliance with environmental laws, particularly important in real estate or industries with significant environmental impact.
Human Resources Due Diligence: Assessment of workforce, compensation structures, employee contracts, and potential liabilities tied to employees.
Purpose of Due Diligence#
Risk Mitigation: To identify and assess potential risks in a deal or relationship.
Informed Decision-Making: To ensure decisions are based on verified information rather than assumptions.
Valuation and Negotiation: To determine whether the price or terms of the transaction are fair based on the actual condition of the entity or asset.
Compliance: To ensure all legal and regulatory requirements are being met, reducing the risk of legal liabilities.