A term that is commonly used in business, due diligence means to act with reasonable care and with caution. Investors who wish to limit risk do their own due diligence before making an investment. Brokers ensure they inform the person they are dealing with of all the information regarding the transaction to ensure they do not have to be held accountable as well as companies that are considering acquiring another business must conduct due diligence on the other side before concluding a deal.
This article focuses on the various types of due diligence and their relationship to the overall process.
The most basic, and basic kind of DD is a regulatory due diligence. This involves looking at the compliance or legal risks related to the transaction. This kind of DD is particularly crucial in highly-regulated industries such as healthcare and finance where infraction could result in fines, penalties, or even operational shutdown.
Financial due diligence is the most commonly used type of DD. It determines whether the financials provided in the Confidentiality Information Memorandum (CIM) are true. It is the process of looking over all financial statements, including liabilities, assets and cash flows. FDD also examines contracts and agreements, such as partnerships and licensing agreements, term sheets, and loan and bank financing agreements.
Administrative due diligence is a kind of due diligence that focuses on administrative-related matters. For instance, this kind of DD looks at the number of facilities owned or leased by a company, the occupancy rate of those facilities, as well as the staffing levels. It could also involve examining employment contracts and nondisclosure agreement.