Types of Due Diligence

We uncover 9 key types of due diligence and examples of how they are used, including practical due diligence checklists.

    This page is all about understanding what is due diligence and what types of due diligence are most commonly seen in the business world. 

    Due diligence occurs when a company considers a potential acquisition or buyer by undertaking a comprehensive risk and opportunity assessment of their business. In the due diligence process, a huge amount of information is gathered across all areas of the business. Conducting due diligence requires looking at past and current performance, confirming the accuracy of reports, and assessing whether a transaction - such as an M&A deal - is viable.

    Read more: What is due diligence in business?
     
    As due diligence investigation is such an exhaustive activity, there are many different types of due diligence that can apply. The importance of each will vary according to the industry and the type of transaction. ‘There may be as many as 20 or more different angles of due diligence analysis’ (Corporate Finance Institute).
     
    When done properly, each type of due diligence will support and inform the others for an integrated approach. Ultimately, all the different examples of due diligence have the same end goal. They provide businesses with the information they need and the confidence that the transaction is worth pursuing.


    Types of due diligence in mergers and acquisitions

     
    1. Financial DD
    2. Legal DD
    3. Tax DD
    4. Operational DD
    5. Intellectual Property DD
    6. Commercial DD
    7. Information Technology DD
    8. HR due diligence
    9. Regulatory DD
    10. Environmental DD​

    Financial due diligence

    Financial due diligence is a crucial assessment of the financial health of the business where the company’s historical and current financial performance is scrutinized. It’s aim is to establish future forecasts with any and all potential risks taken into account.
     
    A key part of financial due diligence is reviewing financial statements, assets, debts, cashflow and projections to determine whether they are true and accurate. This helps the buyer get a better understanding of the company’s core performance metrics.

    Learn more about financial due diligence and ensure none of your most important financial documents are missed in your next process.

    Legal due diligence

    Legal due diligence is an essential part of any transaction and a mandatory consideration before entering into any merger or acquisition. It is an exercise in risk assessment to investigate any potential liabilities of the target company that could impact a successful transaction.
     
    Legal due diligence will typically include a careful examination of all material contracts, including partnership agreements, licensing agreements, guarantees, and loan and bank financing agreements.

    Protect yourself from critical risk in your next transaction. Learn more about legal due diligence.

    M&A tax due diligence

    Tax due diligence is the process of examining all the different taxes applicable to a business, depending on its tax obligations and which jurisdictions it sits within.
     
    Corporate tax due diligence is a review of all the taxes a company is required to pay. It assesses the company’s total tax liability and the level of compliance with tax laws. This includes the validation of documents like tax returns (usually for the last three to five years), information pertaining to tax audits, and agreements with tax agencies. It aims to ensure all the company’s taxes are being paid and reported.

    Assess compliance with tax obligations and understand the impact of tax on the sale price for the buy side. Learn more about commercial tax due diligence.

    Operational due diligence

    Operational due diligence covers all a target company’s main operations and considers all of its operational facilities and processes. In M&A transactions, operational due diligence assesses whether operational improvements could create additional value in the transaction, or if there are operational risks that should be addressed. Learn more about operational due diligence here.

    Intellectual Property due diligence

    IP due diligence is an in-depth assessment of the quantity and quality of a target company’s intellectual property assets. While these assets are intangible, they are often an important contributor to the company’s overall value and something that can set them apart from their competition.
     
    In IP due diligence, patents, copyrights, trademarks and brand are evaluated, along with how well they are protected and covered. Learn more about IP due diligence here.

    Commercial due diligence

    Commercial due diligence (also called market due diligence) is an important step in validating the opportunity strategically. This process looks at the market size, market share, customer base, competitors and potential future returns. Commercial due diligence aims to assess if the deal is financially viable and the likelihood of realizing value from it. Get a better understanding of commercial due diligence here.

    Information Technology due diligence

    IT due diligence is an audit of a company’s IT infrastructure and processes, frequently with a focus on security assessment. This type of due diligence allows the acquiring company to evaluate existing IT structures and identify any potential security risks. Among other things, this includes how sensitive data is managed and protected. Learn more about IT due diligence.

    HR due diligence

    HR due diligence is one of the most underestimated and extensive due diligence types. It covers the entire spectrum of the workforce and all documentation pertaining to employees and management. HR due diligence checks are essential for getting a full picture of the company culture. It can identify any people-based risks before proceeding with a transaction, such as the likelihood of key roles exiting the business.
     
    HR due diligence covers employee contracts, salaries, benefits and bonuses, as well as any problems or grievances. All HR policies and procedures are also carefully analysed.
     
    Ensure you have all the right company human resources information and that it’s structured correctly. Learn the ins and outs of HR due diligence.

    Regulatory due diligence

    Regulatory due diligence is becoming increasingly important for ensuring compliance amid a changing regulatory landscape. It’s crucial that companies undertake regulatory due diligence to identify areas of legal or regulatory risk that usually have a zero tolerance policy.
     
    This type of due diligence is particularly important in heavily-regulated industries such as Healthcare and Finance. Learn more about regulatory due diligence.

    Environmental due diligence

    Environmental regulation is important for a company to demonstrate, as risk of non-compliance can lead to heavy penalties and even operational shut down. Environmental due diligence is the means by which companies review all environmental permits, licenses, and methods of disposal to ensure all regulations are being followed. Learn more about environmental due diligence here.


    Power due diligence with AI 

    The above overview of due diligence types might give you the impression that there’s a lot of work to be done - and there is. One of the ways that Ansarada can help you make these processes as efficient and secure as possible is with a suite of AI-powered deal tools.

    Ansarada’s AI tools can analyze the real-time flow of data from interactions between bidding parties in a deal, including huge volumes of information. This enables dealmakers to garner value from tens of thousands of data points in seconds. They can also automate hours of manual work to save significant time and cost in efficiency alone.

    Learn more about AI-powered due diligence here

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