A phrase that is often used in the business world, due diligence essentially means to take reasonable care and with caution. Investors who wish to limit risk do their own due diligence prior making an investment. Broker-dealers should ensure they inform the other party of all information about the transaction so that they are not held responsible when they are considering buying another company must conduct their due diligence on the other side prior to making the deal.
This article focuses on the various kinds of due diligence and how each type of DD contributes to the overall process.
The first and most https://aboutvdr.com/what-is-a-vdr-virtual-data-room/ basic type of DD is regulatory due diligence, in which the company examines the legal or compliance risk associated with the transaction. This type of DD is crucial in highly-regulated fields like finance and healthcare where a failure to comply could lead to fines, penalties, or even shut down of operations.
Financial due diligence is the most common form of DD. It is a way of ensuring that the financials provided in a Confidentiality Information Memorandum (CIM) are true. It typically involves reviewing all financial statements, assets, liabilities and cash flows as well as projections. FDD also looks over agreements and contracts, including partnerships and licensing agreements term sheets as well as loan and bank financing agreements and more.
Administrative due diligence is focused on confirming admin-related issues. For instance, this kind of DD examines the number of facilities that are owned or leased by a company, the occupancy rates of these facilities, and the staffing levels. It may also include looking at employment contracts as well as nondisclosure agreements.
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