Although most varieties of due diligence have overlapping aspects with each other, specific key distinguishing characteristics are unique to each kind of due diligence and hold the key in unearthing vital information.
Some of the prominent examples of various types of due diligence are explained below:
A. Financial Due Diligence
The most common and widely performed due diligence, financial due diligence involves evaluation of the fiscal stability and performance metrics of the target company. The company’s audited and forecasted financial information is examined to identify faulty accounting practices, and over/understatement of critical financial items.
The central premise of financial due diligence is to allow the buyer to chart trends of historical and actual financial performance with that of the prospects of the target company.
B. Customer Due Diligence
When companies form business partnerships or joint ventures, each party must be privy to the business structures of the other party to ensure there are no illegal transactions such as money laundering, tax evasion, or terrorist financing. The application of customer due diligence greatly reduces the business and reputational risk of conducting business.
The level and intensity of customer due diligence are subject to size, type of company, and the inherent nature of the business relationship.
C. Commercial Due Diligence
Commercial due diligence is mainly employed in the private equity sphere. Through the application of commercial due diligence, venture capital firms undertake a thorough analysis of the target’s internal and external environment to understand its strengths and weaknesses (remember SWOT analysis, anyone?).
Amongst the various types of due diligence, commercial due diligence is the only type that focuses exclusively on potential and substance rather than financial figures.
D. M&A Due Diligence
M&A due diligence is a complete form of due diligence which envisages detailed scrutiny of all aspects of the company. Since M&A involves the amalgamation of two business entities, the scope of M&A due diligence extends beyond the target company. The prospective buyer has to assess the purpose of M&A, potential synergies, and most significantly, the cultural fit of the target within its business structure.
The purpose behind the M&A due diligence extends beyond financial numbers as it also focuses on qualitative factors.
Imprima’s virtual data room allows companies of all sizes to conduct M&A due diligence efficiently. It provides an ultra-secure online document safe wherein useful dashboards, and heatmaps offer a real-time view of bidders’ actions and their respective interests. Not only does the virtual data room facilitate streamlined and documented interaction, but does it in a mode that preserves the confidentiality of the business-critical data and communications. Moreover, advanced document permissions ensure that information is published intelligently and within a bespoke environment to the specific users and groups. There is no doubt that Imprima’s virtual data room will ease the entire process from start to finish.
E. Legal Due Diligence
A niche form of due diligence, legal due diligence focuses exclusively on quantifying potential future legal liabilities. The legal due diligence aims to discern the legal basis of a transaction by undertaking the analysis of employment agreements, intellectual property, loan covenants, pending litigation, among other things.
Legal due diligence almost always requires the assistance of an external legal counsel to identify potential legal obligations.
Due diligence is an evolving exercise, and often multiple due diligences are performed simultaneously as part of M&A due diligence. But what is essential is to understand which type of due diligence is closely aligned with the intended purpose, so as to economise on costs, time, and most importantly, effort.
Traditional due diligence, conducted by a human actor would require them to manually review 100% of documentation in order to discover 50%-85% of what they are actually looking for. On the contrary, Imprima’s AI contract review software, Smart Review, allows you to review just 10% of documentation in order to find at least 95% of what you are looking for. Language agnostic, totally flexible, and without the caveat of ‘teaching’ the AI, which can often be required, Imprima is revolutionising due diligence.