Due Diligence Meaning | 7 Types of Due Diligence

Due Diligence

           In the previous article we have discussed due diligence meaning and process of due diligence. Today in this article let us try to understand the different types of due diligence. 

First lets understand What is Due Diligence ?

            Due Diligence is a systematic process of investigating the acquired information in order to determine whether to carry out the deal or not. The process includes processing quantitative data and qualitative data. Quantitative data refers to sales, cash flows and other financial data while qualitative data refers to quality management, internal control system and so on.

  In simple words due diligence is the process where detailed evaluation takes place. It is the next phase of initial screening.

Types of Due Diligence

There are different types of Due Diligence that take place and they are

§  Commercial Due Diligence

§  Financial Due Diligence

§  Tax due Diligence

§  Legal Due Diligence 

§  Strategic Due Diligence

§  Environmental Due Diligence

§  Human Resource Due Diligence

Now let us try to understand each of the types below,

§  Commercial Due Diligence:

A Commercial Due Diligence is a report which tells about the performance of the business, highlights the potential troubles and also about the achievement of the targets. The commercial due diligence is done with a point of view that the business plan stands up to the realities of the market. This is done with an objective of getting in-depth knowledge about the target company so that its market position, risk associated is uncovered to make the prospective buyer an informed decision. Commercial Due Diligence is done before the negotiation stage.

§  Financial Due Diligence:

Financial valuation is one of the most important parts of the due diligence. Financial assessment or valuation is required in order to determine earnings, cash flows, various areas of risk and also to determine the maximum price payable for the Target Company and best way to finance the merger. In a merger if the offer price is higher than the market value price then it is called premium price while if the offer price is below the market price it is called discounted price. Premium price is paid by the acquiring firm with a thought that the profits of Merger Company after merger can be increased by improvising operations and synergy.

§  Tax due Diligence:

Tax Due Diligence is a process where the acquiring company assesses the tax profile of the target company to reveal the tax exposure. But now the scope of tax due diligence is extended to check if there are any tax benefits that a company can obtain by acquiring the firm. It is one of the primary and prominent due diligence that is carried out in any M&A. Tax due diligence plays a prominent role in the deal structuring.

§  Legal Due Diligence:

Every M&A needs a lot of legal structuring to know that the deal is within the legal and tax framework. An M&A is said to be successful one when the deal is structured in such a way that it meets tax efficient, compliant with SEBI, FDI, Capital Market and government rules, regulations and policies. Even a small mistake or error in the legal point of view will create a big problem or have to pay a huge loss for it as the merger will become unsuccessful.

§  Strategic Due Diligence:

Strategic Due Diligence is the process where the target company is analyzed from the strategic point of view to reveal the strategic benefits of the business or firm. Strategic Due Diligence helps to reveal about market demand analysis, competitive landscape, value chain analysis, market entry barriers, technological, regulatory and environmental risk assessment, operational performance assessment and many such related things to business. It is one of the most important type of due diligence from an acquiring company’s point of view.

§  Environmental Due Diligence:

Environmental Due Diligence is process where the real estate properties are assessed in order to uncover the potential risk associated with it such as soil or ground water contamination or any issues related to environment. The process is carried out by Environmental Protection Agency (EPA). The environment professionals assess the property on various factors.

§  Human Resource Due Diligence:

Human Resource Due Diligence is a process where the key persons of the business or firm are investigating, analyzing and evaluating from various angles to ensure the human resource of the company will not give rise to any negative impact after acquisition. It is done to understand that the work force and key persons are right people who can take the operations after the merger or acquisition. We can also say that Human Resource due diligence is a management audit so that an effective management can come into picture after merger and acquisitions.