22 Oct The Different Types of Due Diligence
Due diligence is a phrase that is commonly used in the world of business. It means to act with care and caution. Investors who wish to limit risk conduct their own due diligence before making an investment, broker-dealers ensure that they inform a party of all details regarding the transaction so that they are not held liable and companies who are contemplating acquiring another company must conduct their due diligence on the other side prior to concluding the deal.
This article will explore the various kinds of due diligence and how each kind of DD contributes to the overall process.
The first and most basic type of DD is regulatory due diligence, which analyzes the compliance or legal risks associated with the transaction. This kind of DD is especially relevant in industries that have strict regulatory requirements, like finance and healthcare in which a failure to adhere could result in penalties, fines or even an immediate shutdown.
Financial due diligence is the most common form of DD. It is a way of ensuring that the financials contained in a Confidentiality Information Memorandum (CIM) are true. It involves checking all financial statements including liabilities, assets, and cash flows. FDD also looks over agreements and contracts, such as partnerships and licensing agreements term sheets loans and bank financing agreements and many more.
Administrative due diligence is one type of due diligence that focuses on administrative issues. This kind of DD for instance, examines the number and occupancy rate of facilities owned or leased, and also the levels of staffing. It may also require examining employment contracts, nondisclosure and non-solicitation contracts, as well as other documentation related to human resources.