Due diligence is a phrase that is commonly used in the world of business. It is a term used to describe the act of acting with care and be cautious. Investors who want to limit the risk of their investment must perform their own due diligence prior to making an investment. Broker-dealers are required to inform a third party of all details regarding a transaction in order to avoid being held accountable. Companies who are contemplating acquiring another business also conduct their due diligence.
This article will discuss the different types due diligence and how they are related to the overall process.
The most basic kind of DD is regulatory due diligence, which focuses on the compliance or legal risks that come with the transaction. This kind of DD is especially relevant in industries with strict regulatory requirements, such as healthcare and finance where non-compliance could result in fines, penalties or even the possibility of a shutdown.
Financial due diligence is the most common form of DD. It checks whether the financials presented in the Confidentiality Information Memorandum (CIM) are true. It involves checking all financial statements including liabilities, assets and cash flows. FDD also looks over contracts and agreements, including partnerships and licensing agreements, term sheets loans and bank financing agreements, and many more.
Administrative due diligence is a form of due diligence which focuses on administrative-related issues. This type of DD includes, for instance, analyzes the number and occupancy rate of the facilities that are owned or leased and also the levels of staffing. It may also require examining employment contracts, nondisclosure and non-solicitation contracts, as well as other documents related to human resources.