The kind of due diligence required is determined depending on the type of business, industry and complexity of the deal. Its goal is to identify unanticipated issues before they affect the transaction negatively and the parties’ interests.
During due diligence, a buyer scrutinizes the financial records of the company of interest, and checks the accuracy and completeness of the figures in the Confidentiality Information Memorandum (CIM). The buyer also scrutinizes the target’s fixed assets (opens in new tab) which include vehicles machines, office furniture, using appraisals and other documents. A buyer will also conduct an exhaustive analysis of a target’s deferred expenses (opens in new tab) as well as expenses that are prepaid (opens in a new tab), and receivables (opens a new tab).
Operational Due Diligence(opens in an entirely new tab) includes analysing the business model along types of due diligence with the culture, leadership, and environment of a company. This includes assessing whether the company is well-positioned to thrive in its targeted market and the quality of its brand. It also assesses a company’s capacity to achieve targets for profit and revenue. Operational due-diligence also involves assessing a target’s HR policies and organisational structures to assess the risk associated with employees, such as golden parachutes and severance packages(opens in the new tab).
The risk assessment is the core of any due diligence process. It includes potential financial and legal risks, and also reputational issues that could arise from the transaction. A thorough due diligence procedure uncovers these risks and reduces them, thus ensuring that a deal is successful.