Due diligence is an integral part of many business transactions and investments. It helps companies make informed decisions and assess the potential risks, opportunities, as well as compliance requirements. It involves conducting in-depth analyses as well as investigations and assessments of data and other information, typically from both external and internal sources.
Due diligence can be operational, financial or strategic. Here are some of most frequent types.
Financial due diligence involves reviewing the financial statements of the target company and identifying red flags, for example, inconsistencies in accounting. It involves looking at the company’s competitive position, business as well as the structure of its leadership and other factors to determine if the deal is an appropriate one.
Legal due diligence focuses on areas like corporate and legal structures commercial contracts and employment agreements, intellectual properties information systems environmental health and safety regulation and taxation, and property. This type of due diligence can help a buyer understand the company’s strengths and weaknesses, allowing buyers to recognize any potential issues and negotiate the most favorable price for the transaction.
Customer due diligence (opens in new window) is an important component of the Know Your Customer process. All financial institutions are required to comply with FATF-compliant laws and conduct due diligence. It aims to ensure that customers are who they say they are, and are not engaging in terrorist or money laundering financing. It involves gathering information from customers, like their full names along with their birth dates and addresses, as well as contact information. It also involves confirming their identity by requesting documents proving their identity, checking them against third-party databases, and then analyzing their behavior for suspicious activities.