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If you’re considering an investment of a significant amount or entering into a contract with another company due diligence is vital. Due diligence can help you avoid costly mistakes and ensure that you are in a good negotiation position when it’s time to decide the conditions of the contract. But identifying flaws and risks does not mean you must stop a deal in its entirety even if the issue are solvable with the proper approach.
In the business and legal world, “due diligence”, initially, referred to how much care a reasonable individual would take when examining important future issues. The investigation would focus on the issues that could affect the future of a company, such as mergers and acquisitions or investing in an offering of shares. Due diligence became a standard procedure in the brokerage industry. Brokers who performed due diligence on a company’s equity offering were required to investigate the company thoroughly before releasing their findings to investors.
Types of due diligence
There are five major types of due diligence: financial, commercial environmental, intellectual property and cyber. The most effective due diligence programs maintain a close collaboration between these diverse areas, even though each will require the services of its own specialists. The work done in one area may inform the checks carried out in a different area.
For instance, financial due diligence typically focuses on verifying that the projections outlined in the Confidentiality Information Memorandum have been made accurate. This involves a thorough review of all financial data and reporting systems, which includes but not just audited and unaudited financial statements, past and present cash flows, budgets as well as capital expenditure plans and inventory.