What are the Different Types of Due Diligence?

Due diligence is a multi-stage, multifactorial and comprehensive financial and economic examination of all information about an individual company or business as a whole. In this article, we will consider its functionality and types.

Due diligence: what is it and what is the purpose?

Conducting due diligence is one of the functions of comprehensive business research. It helps to establish a relationship of trust in connection with the conclusion and implementation of a large agreement between the counterparties. Due diligence is usually performed when buying a business or part of it or purchasing significant objects (real estate, resources, etc.).

Due diligence (DD) is a procedure for forming an objective view of the investee, which includes investment risks, independent assessment of the investee, and many other factors. It is primarily aimed at comprehensive verification of the legality and commercial attractiveness of the planned operation or investment project but also plays an important role in the completeness of the information provided in this type of inspection, which allows investors or business partners to better assess

Upon completion of all three DD stages of teamwork aimed at comprehensive verification of the legality and commercial attractiveness of the planned agreement or investment project, based on the provided and processed information, the executor of the procedure due diligence generates a conclusion (report, report), all the advantages and disadvantages of the analyzed cooperation necessary for further decisions.

Types of due diligence

Specific classifications of DD are based on the nature of the action and the outcome of certain procedures. In this regard, there are the following types of this procedure:

  • Financial DD – focuses on the audit of financial activities and accounting of the enterprise, the key items of reporting planned and budget calculations are subject to analysis. The obtained analytical information is the basis for estimating the value of the enterprise.
  • Legal DD – analyzes the most important legal aspects of financial and economic activities, issues related to compliance with antitrust law, licensing requirements for certain activities, fulfillment of contractual obligations.
  • Tax DD – checks all tax aspects of the planned transactions, analysis of tax returns and other documents that characterize the planned tax payments
  • Environmental DD involves verifying compliance with the use of subsoil, land, water, air, and other resources that make up the environment.
  • Technical DD may be the verification of design, including technical, documentation. Much attention is paid to budget documentation. When preparing construction documentation, special attention is paid to checking the working design of utilities.
  • Marketing DD includes the study of a system of measures aimed at aligning production with the market situation and ensuring sustainable sales; commodity, pricing and communication policy, product promotion systems, personnel management, etc.
  • Economic DD includes all material aspects of activity, ie economic and property status, financial situation, state of cash settlements, etc.

Virtual data room – reliable background for due diligence

DD is a complex and time-consuming procedure, where large arrays of information and documents are processed. The study of the information obtained is done by different specialists separately, then a summary analysis is made. To simplify this process, buy-side or sell-side organize a virtual data room for secure collaboration and file-sharing.

The data room is designed to build an effective system for managing business processes and company documents. The toolkit included in the software allows implementing electronic document management technologies in any company, regardless of its size and form of ownership.