Types of Due Diligence

Due diligence is an essential aspect of making informed choices especially prior to an important transaction like an acquisition or merger. The process involves investigating and evaluating the various aspects of the venture or other entity to ensure that all parties understand the risks that are involved. There are various types of due diligence, such as financial, operational environmental, legal, and more.

Financial due diligence is the process of assessing the financial health of a firm through a review of its profit and loss statements and balance sheets. This helps stakeholders understand the potential risks and determine whether the company is suitable for their investment. Operational due-diligence checks the quality and capabilities of management and IT systems and production systems. This could reveal hidden risks and liabilities which might not have been identified through financial records.

Legal due diligence is the review of all legal documents, such as contracts, license agreements, pending litigation and other legal documents. This could reveal potential legal liabilities and risks as well as verify that the company adheres all legal requirements.

Due diligence in pursuing sustainability is becoming more crucial as consumers and employees insist that companies take the green path such as carbon neutrality. Due diligence can reveal a myriad of issues, such as how a company handles their environmental footprint or the way they handle recycling and other sustainable practices.

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