Due diligence is a crucial step to analyze risks and make informed choices regardless of whether you’re purchasing a property, purchasing a company, or hiring a new employee. Due diligence can take many forms, each with a different emphasis on legalities, concrete numbers and other factors.
Hard due diligence, for example is concerned with the figures and information contained in financial statements. This can include analyzing accounting records, the use of financial ratios and projections of cash flows to the future. It also examines the history of sales, capital expenditure and inventory. Cross-referencing and confirming the documents is a great method to make sure that this information is accurate. This can be accomplished by professionals.
Operational due diligence is a thorough examination of the company’s operation which includes management structure, any legal issues, and the possibility of growth. It evaluates the current situation of the organization and determines whether it is in line with the strategic goals of a potential acquirer. This type of due diligence also looks at the possibility of pitfalls, such as the impact that a deal could have on employees and customers.
Legal due diligence analyzes contracts as well as the history of licensing and litigation to ensure that a business adheres to the law and is risk-free. It is a good idea to engage an outside lawyer or law firm(opens in new tab) to perform this type of due diligence. This will keep buyers from obtaining information that could lead the loss of a deal or unforeseen liabilities once the transaction is completed.
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