Due diligence is an essential component of many transactions, investments and other types of business. It aids companies in making educated decisions and evaluate the potential risks, opportunities, as well as compliance requirements. It involves conducting thorough analyses as well as investigations and assessments of data and information typically from both external and internal sources.
The types of due diligence differ from operational to financial and strategic research. Here are a few of the most popular types:
Financial due diligence involves scrutinising a target company’s financial statements and identifying red flags, such as accounting inconsistencies. It also involves looking at the business model of a company, its competitive position and the structure of its leadership to determine if it is worth the investment.
Legal due diligence examines areas like corporate and legal structures commercial contracts and employment agreements, intellectual properties and information systems as well as environmental health and safety, regulatory compliance as well as tax and litigation and property. This type of due-diligence can help a buyer identify the strengths and weaknesses of the company and potential problems. It can also help to negotiate the best deal.
Customer due diligence (opens in new window) is a key element of the Know Your Customer process. All financial institutions are required to comply with FATF-compliant laws and conduct due diligence. It is designed to ensure that customers are who they claim they are and are not engaging in terrorist or money laundering financing. It involves gathering information from the customers, such as their full names along with their birth dates address, phone numbers, and other information. It also involves verifying their identity by requesting identification documents as well as comparing them to third-party databases, and analyzing their behavior for suspicious activities.