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Types of Due Diligence

Due diligence is a key process in a variety of business deals, including mergers and acquisitions (M&A), private equity or venture capital investments, and the initial public offering. Due diligence is also required for many financial transactions, including mortgages and loans. In the process of due diligence, it’s vital that businesses conduct thorough checks to avoid unpleasant surprises after the deal has been closed.

There are numerous types of due diligence and each one requires a different approach. Due diligence can come in many forms.

Examining financial records and documents like profit and loss reports and balance sheets. Often, this includes the review of contracts related to tangible assets like vehicles and equipment. It may also involve a review of the company’s tax situation, looking for possible tax potential or liabilities.

Legal due diligence entails a review of consolidating legal structures such as ownership agreements, legal structures, and historic and current corporate documents. It’s also important that you consider any litigation pending or imminent and any settlements and judgments.

A process of regulatory due diligence is the process of evaluating the compliance of a company’s target to the laws and regulations of the government. This is particularly crucial in industries that are heavily controlled for example, healthcare or finance. This type of due diligence typically involves an examination of the company’s licenses, permits, and the history of regulatory compliance. Additionally, it can also evaluate the company’s adherence to industry standards and best practices. It is often necessary to seek experts or advisory firms to conduct this type of due diligence.

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