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What is due diligence?

On Behalf of | Oct 4, 2021 | Business & Commercial Law

You hear the term “due diligence” a lot in the business world, especially in the areas of acquisitions and mergers. But what does this term mean? What does it require of you?

As explained by the Corporate Finance Institute, due diligence is the extensive investigative process you go through in order to fully assess the company you intend to acquire or merge with. Its purpose is to verify that everything about the target company is as its current owner says it is. Consequently, you will analyze numerous aspects of the company. Here are just a few.

Financial Due Diligence

You likely will place financial due diligence at the top of your list. This includes analyzing such things as the following:

  • The company’s financial statements for at least the preceding three years
  • Its inventory schedule
  • Its financial projections
  • Its capital expenditure plan
  • Its list of debtors and creditors
  • Its profit margins

Administrative Due Diligence

Administrative due diligence includes such things as verifying the target company’s number of facilities, their occupancy rate, how many workstations each facility contains and the operational cost of running each one.

Legal Due Diligence

Legal due diligence examines the target company’s documents, including the following:

  • Articles of incorporation, partnership agreement, or other foundational documents
  • Operating agreement
  • Minutes of all shareholder and board meetings for the preceding three years
  • Agreements with key management personnel
  • Franchising or licensing agreements

Additional Due Diligence

Depending on the size and nature of the target company, you likely also will want to investigate its following areas:

  • Human resources
  • IT networks
  • Intellectual property
  • Customer base

Finally, you need to know how well the target company will fit into your own strategic plan, including your company’s corporate environment.