What Are the Types of Due Diligence

types of due diligence

The completeness of the information obtained during due diligence allows commercial partners or investors to evaluate all aspects of cooperation. So, what is it and what are the types of due diligence?

Due diligence: what you should know

Due diligence (DD) is used in particular before a company is bought. To ensure the quality of a company or another object of purchase, an investor examines all relevant aspects of his planned investment. It includes the collection of a variety of information so that you can form an objective view of the chosen investment object. Conducting DD contributes to making informed decisions due to the information received.

This check involves a systematic analysis and evaluation of the strengths and weaknesses of the object to secure the planned purchase – it gives the contractors clarity about the traded values and risks. Since this procedure often involves details, it can usually only be carried out with the help of experts such as lawyers, auditors, industry experts, or technicians. By preparing due diligence, a careful analysis of all information is carried out for both the buyer and the seller, which means that frequently occurring questions can be answered in advance.

There is a list of situations in which this analysis technique should be carried out as a mandatory initial stage, namely:

  • business merger or acquisition;
  • acquisition of shares or shares of the company;
  • purchase of real estate;
  • establishment of new partners;
  • provision of loans;
  • target financing, in particular sponsorship or gratuitous.

The process of professional due diligence can take several months. The whole careful process is often broken down into phases. Finally, a report is prepared. Besides, it is also a standard to conduct this procedure in a secure well-structured virtual data room. It is a digital platform that enables productive deal management and collaboration.

Popular due diligence examples

So, there are the following types of DD:

  • Market-related DD allows you to assess the competitiveness of the investment object: the position of the brand and its products on the market, development prospects, or the risks of losing consumer loyalty and consumer demand.
  • Corporate legal DD: The legal structure of the company, all contracts, capital increases and other capital measures, the resolutions of the shareholders, the supervisory board, and the situation of the shareholders are examined here.
  • Tax DD is aimed at checking the actual position of the company in the sphere of fulfilling the duties of a taxpayer. As part of the audit, specialists look at the presence of tax arrears, correctness, and timeliness of payment of payments to the budgets, applied tax optimization schemes, the company’s financial statements, asset inventory.
  • Environmental DD: In some cases, it may also be necessary to check whether potential environmental risks are caused by the respective investment.
  • Legal DD is aimed at identifying the company`s rights, obligations, and legal risks. A legal specialist analyzes all company documentation related to the alienation or acquisition of property, studies documents for real estate objects, intellectual property, examines all current transactions with counterparties, identifies threats of prosecution.
  • Financial DD is aimed at assessing the efficiency of the company’s economic activity and its solvency. The expert checks the company according to various indicators in the aggregate liquidity, financial stability, enterprise profitability, business turnover.
  • Technological DD is associated with checking the IT infrastructure and compliance with the principles of business information security (for example, part of the DD assessment, in this case, is a legal audit of the site).