Due Diligence Types and Key Aspects
1. Financial Due Diligence (DD)- Analyze a company’s financial health and performance, assessing the quality and
sustainability of its earnings and cash flow.
- Includes:
- Reviewing accounting policies, audit procedures, and internal controls.
- Assessing assets, liabilities, tax implications, and potential legal liabilities.
- Examining key operational processes and financial information systems for reliability.
2. Legal Due Diligence (DD)- Manage legal risks, providing insights into the company’s legal compliance, licensing
agreements, contracts, and regulatory adherence.
- Includes:
- Verifying compliance with laws, and assessing litigation risks, unpaid taxes, and past business failures.
- Reviewing assets, intellectual property, and potential cross-border issues like double taxation and currency risks.
3. Business Due Diligence (DD)- Provide a comprehensive view of the business to the buyer, covering all material
facts without disrupting operations.
- Includes:
- Assessing operational, strategic, technical, and environmental factors.
- Reviewing human resources and timing for a smooth acquisition process.
4. Intellectual Property Due Diligence (IP DD)- Assess the company’s intellectual property (IP) assets, essential for
companies, especially in tech.
- Includes:
- Identifying IP assets, verifying ownership rights, evaluating validity, and ensuring there are no infringement
claims.
- Reviewing patents, copyrights, trademarks, trade secrets, and domain names.
5. Information Technology Due Diligence (IT DD)-Assess the IT infrastructure’s reliability, capacity, and alignment
with business operations.
- Includes:
- Sending an IT checklist to gather information on IT stability, growth capacity, and software ownership.
- Reviewing IT resources onsite to address any technology issues or improvements.
6. Human Resources Due Diligence (HR DD)-Evaluate HR’s contribution to business goals and employee
management, focusing on company culture, policies, and benefits.
- Includes:
- Reviewing HR’s alignment with organizational goals, cost, and effectiveness of HR policies.
- Assessing structure, skill levels, employee benefits, pensions, health insurance, and litigation involving employees.
7. Operational Due Diligence (DD)-Understand the company’s day-to-day operations and identify areas for smoother
post-acquisition management.
- Includes:
- Examining new product or service creation, market dynamics, competition, sales, and organizational structure.
These due diligence processes provide a comprehensive view of the target company to help buyers make informed
decisions in mergers and acquisitions.
Due Diligence Process: Overview
1. Planning
- Defining Scope: Outline key areas to investigate, focus areas, and determine which aspects are critical.
- Team Appointment: Select a skilled team with expertise and clearly define each member’s role.
- Mandate and Time Schedule: Establish responsibilities, set deadlines, and allocate resources.
- Checklist and Templates: Prepare a Due Diligence Checklist and finalize data templates and tools for consistency.
2. Data Collection
- Research Types: Use both quantitative data (surveys for broad insights) and qualitative data (interviews for deeper
insights).
- Data Collection Tools: Choose methods based on the needed accuracy, information type, and available time and
resources.
- Sources: Access data from various sources, including internal management interviews, data rooms, industry reports,
and regulatory bodies.
3. Data Analysis
- Understanding the Target Company: Evaluate all collected information with a focus on the due diligence objectives.
- Decision Factors: Assess critical business factors, complexity, infrastructure needs, and risks to form a final
recommendation.
4. Preparation of Due Diligence Report (DDR)
- Report Content: Include a summary of the scope, disclosed information, and analysis of findings.
- Executive Summary: Highlight legal and business issues, risks, liabilities, and factors that could affect the
transaction price.
Roles of Professionals in Due Diligence
- Key Professionals: Company Secretaries, Chartered Accountants, Cost Accountants, Lawyers, and Financial
Analysts.
- Skills Needed: Expertise in their fields, strong analytical skills, business advisory capabilities, and adherence to
deadlines.
Importance of Due Diligence-Due diligence is essential in identifying and managing risks, providing clear insights for
effective mergers and acquisitions, and enhancing decision-making in complex business transactions, particularly in
competitive markets.
Common Due Diligence Challenges
- Psychological and Practical Issues: Information overload, delays in responses, and voluminous unimportant data can
hinder progress.
- Company Resistance: Companies may resist or skew information for personal or professional gain.
- Complexity: Due diligence is intricate, often uncovering unforeseen negatives or complications.
Conclusion-Due diligence is a critical "business investigation" that thoroughly analyzes and assesses the risks and
value of a potential transaction. It enables buyers to make informed decisions, evaluate business conditions, address
litigation, negotiate pricing, and plan investment strategies effectively.
