Types of Due Diligence

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Types of Due Diligence

If you are contemplating making a major investment or signing an agreement with a different company due diligence is crucial. Due diligence can help you avoid costly mistakes and help you to be in a better negotiation position when it’s time to determine the conditions of a contract. However, identifying risks and flaws doesn’t mean you have to call off a deal entirely even if the issue are solvable by using the right method.

In the legal and business world, “due diligence”, originally, referred to the amount of effort a reasonable person would use when investigating important future issues. The investigation would concentrate on issues that may affect future decisions, such as mergers and purchases or investing in stock offerings. Due diligence became a standard practice in the brokerage industry. Broker-dealers who were conducting due diligence on an equity offering were required to research the company thoroughly and report their findings to investors.

Types of due diligence

There are five primary types of due diligence: financial, commercial environmental, intellectual property and cyber. While each of these areas might require a dedicated team the most effective due-diligence programmes maintain an element of close cooperation. A particular area of work can inform the checks being carried out in other areas.

For instance financial due diligence typically focuses on verifying that the projections presented in the Confidentiality Information Memorandum are correct. This requires a thorough analysis of every financial report and data, including but not restricted to audited and unaudited financial records including budgets, cash flows, capital expenditure plans, as well as inventory.

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