Due diligence is a rigorous examination carried out prior to making any major business decision like mergers, acquisitions, and investments. It involves a thorough assessment of the company’s assets, liabilities and overall financial health. It also checks for legal risks and compliance. Incorrect or inadequate investigations are one of the main reasons for M&A deal failures.

There are a variety of types of due diligence, and each comes with its own set of requirements. The primary objective of due diligence is to find any potential issues that could hinder the transaction or increase the risk post-transaction. It is crucial to have a variety of sources available to conduct research. This could include free search engines and information services that are paid online and specialist databases.

There are two types of due diligence: soft and hard. Hard due diligence is dependent on numbers and information such as audited financial statements such as profit and loss reports in budgets, balance sheets and projections. It also involves a thorough look at a company’s contracts and lease agreements, real estate specifics (deeds mortgages, mortgages, use permits and title policies) as well as the history of sales and purchases. It is crucial to compare this information with similar companies in the industry to get a feel for the size of the company and its growth prospects.

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