The Different Types of Due Diligence

A term that is commonly used in business, due diligence is to take reasonable care and caution. Investors looking to reduce risk do their own due diligence before making an investment. Brokers ensure that they inform the parties of all information about the transaction to ensure they don’t have to answer for their actions, and companies considering acquiring another firm do their due diligence on the other side prior to concluding the deal.

This article reviews the different types of due diligence and their relationship to the overall process.

The first, and most basic, type of DD is a regulatory due diligence. This involves analyzing the legal or compliance risk associated with the transaction. This type of DD is particularly important in highly-regulated fields like healthcare and finance where breach of compliance could lead to fines, penalties, or even shut down of operations.

Financial due diligence is the most frequent type of DD. It checks whether the financials presented in a Confidentiality Information Memorandum (CIM) are accurate. It usually involves looking over all financial statements as well as liabilities, assets and cash flows, as https://aboutvdr.com/what-is-a-vdr-virtual-data-room/ well projections. FDD also reviews agreements and contracts, such as licensing and partnership agreements, term sheets loans and bank financing agreements, and more.

Administrative due diligence is a kind of due diligence that concentrates on administrative-related issues. This kind of DD is, for instance examines the number and occupancy rates of facilities owned or leased, and also the levels of staffing. It may also look at the terms of employment agreements and nondisclosure agreements.