Due diligence is a phrase that is commonly used in the business world. It means to act with care and caution. Investors who want to reduce the risk of their investment must perform their own due diligence prior to investing. Broker-dealers are required to inform a third party about all details about a transaction to ensure that they do not get held responsible. Companies who are contemplating acquiring another company also conduct their due diligence.
This article focuses on the various types of due diligence, and how each type of DD is related to the overall process.
The first, and most basic, kind of DD is a regulatory due diligence. It involves analyzing the compliance or legal risk that is associated with the transaction. This type of DD is especially relevant in industries with high regulation requirements, such as finance and healthcare where non-compliance could result in fines, penalties or even an immediate shutdown.
Financial due diligence (FDD) is the most frequently-used type of DD and seeks to check whether the financials provided in the Confidentiality Information Memorandum are accurate. It typically involves examining all financial statements and financial statements, including liabilities, assets and cash flows, as well as projections. FDD also looks over agreements and contracts, like partnership and licensing agreements, term sheets, loan and bank financing agreements and many more.
Administrative due diligence focuses on confirming admin-related issues. For instance, this type of DD analyzes the number of facilities which are owned or leased by the company, the occupancy rates of these facilities, and the levels of staffing. It may also look at employment contracts as well as nondisclosure agreements.
