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Due diligence is a crucial component of making educated decisions, especially before any major transaction such as a merger or an acquisition. The process involves researching and evaluating various aspects of the venture, company or entity to ensure that all parties are aware of the risks that are involved. Due diligence could be operational, financial or legal.
Financial due diligence is the process of evaluating a company’s financial health by examining its statement of profits and losses and balance sheets. This helps stakeholders understand potential risks and determine if the company is suitable for their investment. Operational due-diligence checks the quality and capabilities of management and IT systems as well as production. This can uncover hidden risks and liabilities that may not have been disclosed in financial reports.
Legal due diligence is an examination of all things legal including contracts, licensing agreements as well as pending litigation and other legal documents. This may reveal potential legal liabilities and risks and also ensure that the business is in compliance with all legal requirements.
Sustainability due diligence is becoming increasingly crucial as workers and consumers insist that companies stand on green issues, including carbon neutrality. Due diligence can reveal a variety of issues, for instance how a company handles their environmental footprint or how they manage recycling and other sustainable practices.
