Due diligence is an investigation or audit of a potential investment or product to confirm all facts,
such as reviewing all financial records, plus anything else deemed material.
It refers to the care a reasonable person should take before entering into an agreement or a financial transaction with another party.
Due diligence can also refer to the investigation a seller does of a buyer; items that may be considered are whether the buyer
has adequate resources to complete the purchase, as well as other elements that would affect the acquired entity or the seller after the sale has been completed.
The followingare the major types of Due Diligence services offered:
This happens when an employee damages your company.
This can include introducing dangerous ingredients to a product that leaves your plant and heads to consumers, causing faulty manufacturing that leads to defective products or doing other physical tampering to your goods.
An employee can also sabotage your company by planting a virus on your computer network or destroying sensitive materials.
Financial due diligence is the procedure a prospective buyer undertakes in order to evaluate the financial stability and health of the assets up for sale. The company’s financial data is scrutinised, and any mitigating areas that could pose a risk are identified. The key benefit of financial due diligence is that the buyer gains knowledge of the historical and actual financial performance of a company, alongside forecasting it’s future financials.
Commercial due diligence is the process that a private equity firm undertakes when gauging a company’s commercial potential. Commercial due diligence provides a full overview of the target’s internal and external environment, unlike financial due diligence which focuses solely on the financial health of a company.
When forming new business relationships, companies will often want establish if a prospective customer
is involved with illegal practices such as money laundering, or funding terrorist organisations.
In this scenario, the process of customer due diligence greatly reduces the risk of conducting business
with a new customer.
The level of customer due diligence required will vary depending on the size, type of client and the business relationship it has with the customer.
Vendor due diligence is the process that a private business undertakes when it is either being sold or when it’s assets are up for sale. Vendor due diligence is conducted at the request of the seller, and is usually managed by an independent third-party. The third-party produces a due diligence audit which reports on the financial stability of the company in review, which is available to potential investors.
Third-party due diligence is the process a business undertakes when it is looking to outsource work to an external company, in order to understand the level of risk involved. This type of due diligence has become increasingly important in recent years due to the introduction of strict anti-bribery legislation, which requires companies to provide evidence that they have sufficient anti-bribery measures in place.