Due diligence is an essential element of making informed decisions, especially prior to major transactions such as a merger acquisition. The process involves analyzing and evaluating various aspects of the venture or other entity that is being considered to ensure that all parties understand the risks involved. There are multiple types of due diligence, including financial, operational, legal, environmental and many more.
Financial due diligence is the process of evaluating the financial health of a company through a review of its profits and losses statements and balance sheets. This allows stakeholders identify the potential risks and determine whether the company is suitable for their investment. Operational due diligence checks the quality of management as well as IT systems and production capabilities. This may uncover hidden risks and liabilities that may not have been revealed in financial reports.
Legal due diligence involves an examination of everything legal including contracts, licensing agreements, pending litigation, and other legal documents. This can expose any legal risk and liabilities, while also making sure that the business adheres to all legal requirements.
Due diligence in pursuing sustainability is becoming more essential as consumers and employees insist that companies take a stance on green issues like carbon neutrality. Due diligence can reveal a myriad of issues, such as how a company manages their environmental impact, or how they manage recycling and other sustainable practices.