Let us discuss the different types of due Diligence. Due Diligence plays a crucial role in assessing the different aspects like financial, operational, HR, legal etc., to proceed with the company’s Merger and acquisition.
Importance of Due Diligence
Due Diligence is crucial in assessing the company’s risks and helps to identify opportunities. Before the finalization of the process of Mergers and acquisitions, due Diligence helps in ascertaining the financial, operations, and other policies of the company to be acquired.
Due Diligence will assist in identifying the weaknesses and other red flags in the organization. In general, Due Diligence in the UAE helps in understanding the current state of affairs in the organization.
Types of Due Diligence
The below are the different types of Company Due Diligence which are helpful to analyze the financial and other related aspects of the company.
1. Financial DD
Financial Due Diligence is the assessment of the company’s financial soundness where the company’s historical and current financial performance is scrutinized. It is conducted to establish any future forecasts with all potential risks taken into account as part of the assessment.
Due Diligence involves reviewing all financial statements of the business, company assets & debts, cash flow and financial projections to determine accuracy and fairness. This exercise will further help the potential buyer better understand the business’s core performance metrics.
2. Legal DD
Legal Due Diligence is always a significant part of any business transaction and a mandatory consideration before proceeding into any potential merger or acquisition. The primary purpose of the legal due diligence exercise in risk assessment to examine any potential liabilities of the company to be acquired that could impact a successful transaction.
Legal Due diligence involves a thorough examination of all material contracts of the company, which includes partnership agreements, licensing agreements, guarantees, secured & unsecured loans and bank financing agreements.
3. Operational DD
Operational Due Diligence involves examining a target company’s primary operations and considers all of its operational facilities, policies and processes. In all the Merger & Acquisition transactions, operational due Diligence ascertains whether the operational improvements could result in any additional value to the transaction or if there are any potential operational risks.
4. Tax DD
Tax due diligence involves investigation into different taxes applicable to a business, depending on the company’s tax obligations and the jurisdictions the company operating within. The tax due diligence assesses the business’s total tax liability and compliance with applicable local tax laws. The process includes thorough validation of relevant documents like tax returns (usually the returns filed for the last three to five years), information related to tax audits, and agreements with necessary tax agencies.
5. Intellectual Property DD
Intellectual property due diligence involves assessing the quality and quantity of the target company’s intellectual property assets. While intellectual property assets are intangible, they are the most significant contributor to the company’s overall valuation and plays a critical role in the process of mergers and acquisitions.
Intellectual property Due Diligence involves a thorough evaluation of all the patents, copyrights, trademarks, and brands of the company and the protection and coverage of the same.
6. Commercial DD
The commercial due diligence process evaluates different commercial aspects of the company such as market size and share, customer base, products & services, competitors and potential future returns on the sales. Commercial due diligence is conducted to assess if the proposed deal is financially viable and the likelihood of value realization from the Merger & acquisition. It briefly involves validating the opportunity strategically.
7. Information Technology DD
Due Diligence involves a thorough evaluation of the company’s IT infrastructure, policies and processes with a primary focus on the security assessment. Due Diligence allows the acquiring company to ascertain the existing IT infrastructures and identify any potential security risks. It also includes an examination of the process implemented in place to manage and protect sensitive data.
8. HR DD
HR Due Diligence involves covering all the aspects of the company’s workforce, which involves all documentation about employees and company management. HR due diligence checks help understand the complete picture of the company culture. The process can identify any potential HR-related risks before proceeding with a transaction. HR due diligence ascertains the employee contracts, salaries, insurance benefits and bonuses, and any existing problems or grievances currently open.
9. Regulatory DD
It is become increasingly crucial to ensure compliance amid forever changing regulatory landscape. It is also imperative to keep updated with the regulatory changes. Significantly, businesses undertake regulatory due Diligence to identify and evaluate the areas of legal or regulatory risk with having a zero-tolerance policy. Regulatory due Diligence is mandatory for heavily regulated industries such as Healthcare and Finance to identify and mitigate any potential risks.
10. Environmental DD
Environmental due Diligence involves examining a company risks of non-compliance with necessary environmental rules and regulations, which can lead to heavy penalties and even operational shutdown. Environmental due diligence is the process by which businesses review all environmental licenses, permits, and other disposal methods to ensure all regulations are being followed as required.