Before we talk about how to conduct due diligence, we will define the term - "Due diligence."

Due diligence is a form of research, audit, review or an investigation carried out to know and confirm the facts or have more details on a matter that is under consideration for acceptance.

As a business enthusiast who is interested in purchasing a business for start-up, or interested to buy another business to boost and expand the existing one or even when an already established business is interested in buying a particular product to includes it on their own, then it is mandatory to know all about due diligence and how to make use of it to make the right decision when you carry out any of the above exercises.

Due diligence is a thorough investigation into a particular business or product that interest you and which you wanted to acquire. To be on the safer side before making the purchase, due diligence must be conducted by the buyer before deciding whether to or not to buy or pay the amount fixed for the purchase of the business or product.

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In conducting due diligence for a company for financial purposes, there are key issues such as the company’s profit, financial risk, legal issues and even potential deal-breaker which must be given absolute attention by looking at the available historical record to determine the future of the business.

What Is Due Diligence

Due diligence is a careful exercise expected from a business or an individual to take before entering into a pact or agreement with any party. It is a process through which a potential acquirer of a business or industry takes to evaluate the targeted company or its assets for takeover.

The rationale behind due diligence thus is to aid the potential business or individual planning to acquire a particular firm to make an informed decision through using the available and quality information available to him that are related to the target company and ensuring that the information and data gathered from the investigation are duly used to make a decision that can address the potential risk and realize, determine the value of the target business and predict what may be the aftermath of the business after acquiring it.

Due diligence has become one of the necessary measures and processes in mergers and acquisitions and if conducted properly by the buyer, the result gotten can confirm if the claims of the seller about the business are real or not.

Due diligence is a unique method to review, analyze target company to curb the risk that may arise from a business or a potential investment.

Due diligence processes involve examining the target company numbers, comparing those numbers over time and marking them against a competitor. It entails a background check on a potential target business that you wish to own or take over.

Types To Due Diligence

While due diligence is understood to be an extensive process undertaken by a business or individual to determine the target company assets, capabilities and financial performance.

Thus, they can be as many types of due diligence. Below are five types of due diligence explained above.

Financial Due Diligence

Financial due diligence is one of the most important types of due diligence which is done to confirm if the financial record provided by the company are accurate or not.

This due diligence type aims to provide a depth understanding of the  target company financial activities/records, inclusively, the audited financial statement for the last 5 years, recent unaudited financial statements, the company’s projections, capital expenditure plan, schedule of inventory etcetera.

Administrative Due Diligence

This is the type of due diligence that is done to confirm all administrative activities like; occupancy cost, facilities, numbers of employees and many more.

The rationale behind this type of due diligence is to know all the facilities, machines or equipment that belong to the seller and determine if the operational cost is included in the financial records or not.

Through the administrative due diligence, the buyer will have a clear idea  on the type of operational cost they should establish should they plan to expand the company later.

Asset Due Diligence

This type of due diligence report usually includes a detailed schedules report of fixed assets and where they are located (for physical asset), all lease agreements for equipment schedule of sales and purchase of major capital equipment for the past 5 years and u use permits.

Human Due Diligence

This due diligence provides accurate results on the current number of total employees available in the target company, available vacancies, employees that are due for retirement etcetera and lastly.

Tax Due Diligence

This includes a review of all the taxes the company is expected to pay and ensure that they are appropriately calculated without any form of underreporting of the taxes. While carrying out this type of due diligence, ensure to verify each tax status from the tax authorities to determine the successful taxes that has been paid and the ones that are still pending.

How Due Diligence Is Conducted In A Financial Company

How to conduct due diligence on a company varies. As a general principle, the larger the company, the more intensive due diligence is needed.

Therefore, it’s thus important to know how to conduct due diligence by mastering the six basic steps that are provided in this content.

We have simplified the various steps on how due diligence is conducted in a financial company that shall allow you to have access to the important information before making your new investment.

All the steps are arranged accordingly that you shall make use of what you’ve learned from the previous step to conduct the next one.

Listed above are six basic steps that show how to conduct due diligence.

Evaluate The Potential Goals Of The Project

The need to acquire and merge a business with your current own for expansion is classified here as a project. Thus, knowing the goals that must be actualized from this project is thus the very first step to undertake.

This will help make available the needed resources, what is needed to glean on and assures successful alignment with target company strategy.

Analyse Business Financials Record

This step is about an exhaustive audit of the financial record of the target company. It ensures that the records contained on documented as in the Confidentiality Information Memorandum (CIM) are all correct.

This step will also help reveal the target company asset health status, investigate the general financial performance and stability and reveal any form of danger if there is any.

In carrying out this step, the above variables must be inspected thoroughly;

• Inventory schedules
• Balance sheets and income statement
• Stock history and options
• Profit and growth record
• Tax forms, information and documents

Critical Evaluation Of Documents

This step is done in two-way forms which start inform of conversation for the start. At first, the buyers asks for the company financial document for audit, carry out interviews or survey and even proceed to site inspection for physical verification.

Through this examination, the buyer would determine through the information collected whether or not the target company observe proper business practices and as well as responsible legal and environmental compliance. This is the main part of the due diligence process.

Business Plan And Model Analysis

This process entails that the buyer should thoroughly check the target company’s business plans and model. This is basically to determine if it is viable and how far can the target company can be integrated with theirs to provide positive outcome.

Final Offering Formation

After the information has been gathered and all the necessary documents are been examined, all the individuals, teams and actors involved in the deal thus collaborate to share their different views and evaluate their findings.

The information gathered will be used to perform valuation techniques and methods. This will determine the amount of money the buyer will finally offer for the acquisition of the target company.

Risk Management

Risk management is an overall assessment of the target company to forecast the potential risk that may arise with the transaction and how it can be averted.

Conclusively

It’s quite obvious that conducting due diligence, takes a whole lot of complicated processes but it mustn’t be inefficient or even disorganized.

If the outlined processes on how to conduct due diligence are followed accordingly, the result will be productive. Moreover, diligence reveals information that can be applied to a business to become successful.