Due diligence is a vital investigation tool that assists in assessing the risks involved in contracts and transactions. It also assists in making informed decisions. It involves the meticulous analysis of all aspects of a venture or investment from its legal and financial history to its market performance which allows parties to anticipate potential risks and negotiate terms with confidence.
The scope of due diligence may differ based on the type of transaction and business model, but it is typically conducted prior to any merger or acquisition. Equity research analysts, fund manager, broker-dealers or individual investors are able to conduct due diligence. It is also conducted by private companies and government agencies, which are required by law to conduct due diligence on their investments.
Besides analysing financial statements, legal agreements, and other legal documents, this procedure could also include analyzing human capital by assessing employee compensation, turnover, and skills, and talent retention strategies. It can also look at the condition, quality, and ownership of assets such as inventory, equipment, and real estate properties.
It is essential to employ the right tools when conducting an extensive due diligence. They can include cloud-based software solutions that provide secure and centralized repositories to organize, store, and sharing due diligence documents. They also have features such as access controls, control of versions and audit trails as well as indexing of documents. Additionally, they facilitate collaboration and communication between teams and stakeholder groups regardless of physical location.