Due diligence is the activity of taking reasonable care while conducting business. Due diligence check means investigating the economic, legal, fiscal, and financial situation of a business. This includes sales figures, shareholder structure, and links with ways of economic crime such as corruption. This is required whenever a company initiates associations with business partners or plans to buy some property or plan investments in real estate.
According to the German Institute for Compliance (DICO), a business partner is a party having business contact with a company and is not an employee or doesn’t manage the company.
Notwithstanding the extent or type of business relationship, many people are involved including customers, suppliers, subcontractors, sales representatives, advisors and partners in joint ventures, and small service providers, intermediaries, and investors.
A due diligence audit allows companies to conduct risk and compliance checks to safeguard themselves by going through the terms and conditions of a mutual arrangement or an offer and looking out for relevant risks. The type of due diligence that is alright varies depending on the specific situation, business transactions, and the nature and type of risk.
Due Diligence investigation is a necessary business technique to look into before making any major business decisions or acquiring a company. While putting your company finances into action, you need to figure out its due diligence and how you can do it correctly.
Due Diligence is a way that comprises risk and compliance check, taking care of an investigation, review, or audit to check facts and news about a certain subject. Due Diligence means carrying out your homework and acquiring the required knowledge before getting into a deal or contract with another company.
Due Diligence is carried out by equity research firms, fund managers, individual investors, risk and compliance analysts, and firms and broker-dealers. Individual investors are free to undertake their own Due Diligence. Broker-dealers by law to carry out due diligence on security before selling it.
Some of the external sources are:
1. Administrative Due diligence
It verifies admin-related issues like facilities, occupancy rate, number of workstations, etc. Why should you do due diligence? It is to verify several facilities owned by the seller and decide if all operational costs are captured in the financials.
2. Financial DD
A type of due diligence is financial due diligence that enquires if the financials displayed in the Confidentiality Information Memorandum (CIM) are true or not. Financial DD gives you a thorough understanding of all the company’s financials, which covers audited financial statements for the last three years, unaudited financial statements, the company’s projections, and the basis of such projections, capital expenditure plan, schedule of inventory, debtors and creditors, etc.
The financial due diligence investigation includes a study of many customer accounts, fixed and variable cost analysis, analysis of profit margins, and examination of internal control procedures.
3. Asset DD
A type of due diligence undertaken is asset DD. Asset due diligence reports are always a detailed schedule of fixed assets and their locations, all lease agreements for equipment, a schedule of sales of major capital equipment during the last three to five years, real estate deeds, mortgages, and title policies.
4. Human Resources Due diligence
Human resources due diligence Service covers many aspects. It involves an analysis of total employees, including current positions, vacancies, due for retirement, and serving notice period; an analysis of current salaries, bonuses paid during the last few years, and years of service; all employment contracts, with nondisclosure, non-solicitation, and non-competition agreements between the company and its employees. When there are a few points in which there are lapses in the general contracts, any questions or issues need to be clarified.