Due diligence is a phrase that is often used in the world of business. It is a term used to describe the act of acting with care and prudence. Investors who wish to reduce risk should conduct their own due diligence before making an investment. Broker-dealers make sure they inform the parties of all details regarding the transaction to ensure they are not held responsible and companies who are contemplating acquiring another company must conduct their due diligence on the other side prior to concluding an agreement.
This article examines the different types of due diligence and how they are related to the overall process.
The first, and most basic type of DD is a regulatory due diligence. This involves analyzing the compliance risk or legality related to the transaction. This kind of DD is particularly important in industries with high regulation requirements, such as finance and healthcare where a breach of compliance could result in fines, penalties or even https://aboutvdr.com/how-to-win-business-with-collaboration/ a shutdown.
Financial due diligence (FDD) is the most commonly used form of DD and aims to determine whether the financials showcased in the Confidentiality Information Memorandum have been compiled in a reliable manner. It is the process of scrutinizing all financial statements, including liabilities, assets, and cash flows. FDD also examines contracts and agreements, which include partner and licensing agreements, term sheets, and loan and bank financing agreements.
Administrative due diligence is a kind of due diligence that concentrates on administrative-related matters. This kind of DD, for example, looks at the number and occupancy rate of facilities leased or owned by the company, as well as the staffing levels. It could also include a look at employment contracts, nondisclosure agreements, non-solicitation agreements, and any other documents related to human resources.