From financial health to environmental issues, it is crucial to get a complete picture of all sub-areas. Is the forecast consistent with the current fiscal year? Are profit figures too rosy due to chosen depreciation methods? And are there incremental costs? Such discussion points come to light by performing different types of due diligence.

9 types of due diligence

During a due diligence investigation, various aspects are examined. We distinguish the following sub-areas:

• Financial Health: Analyzing financial statements, accounting practices, liabilities, assets, income and expenses to assess the financial stability and performance of the company.
• Legal issues: Examining legal documents, such as contracts, lawsuits, intellectual property rights and regulatory compliance to identify potential legal risks.
• Commercial aspects: Evaluating the company’s market, competition, customer relationships and growth potential. As well as researching marketing strategies and sales performance.
• Operational processes: Evaluate operational activities, supply chain, production processes and management structure to understand how the company operates.
• Customers and Suppliers: Assessing customer relationships, key customers and suppliers, and the company’s dependence on these relationships.
• Strategic fit: An analysis of the assets to be acquired fit to assess how they can be integrated within the strategy and goals of the buyer or investor.
• Technology check: An assessment (if applicable) of the company’s technology infrastructure, systems and intellectual property. An identification technological risks and opportunities.
• Human Resources: Gaining an understanding of employee structure, terms and conditions of employment and any personnel-related problems.
• Environmental issues: Assessing any environmental related responsibilities or risks the company may have.

Discussion points

Due diligence may reveal that reality does not quite match previously outlined expectations. These differences will lead to discussion points, and possibly prompt a renegotiation or cancellation of the deal. In this regard, the following situations are common:

• Contract issues: the analysis of contracts may reveal, for example, obligations that a buying party did not consider. Or contracts may actually be terminated at short notice, making turnover more uncertain, for example.
• Declining sales in the current fiscal year: Sales appear to be behind the forecast made in the IM. Perhaps customers have cancelled, fewer new customers are coming in, or customers are ordering less. Less sales means less profit and lower EBITDA, often one of the basic components of valuation.
• Depreciation methods used: The depreciation method also affects earnings. If it turns out that an excessively long depreciation period was used in recent years, for example, then a book loss may have to be taken to normalize the accounts and investments may have to be made earlier.
• Escalating costs: Rising costs can also be a discussion point. If sales remain the same, profitability declines, for example due to higher facility costs or a recent increase in salaries.

Next step

Not only is it important to go through the process of due diligence in a structured way, preparing for it is a process in itself. This way you avoid pitfalls such as a lack of depth or expertise. You can read more of these preventable pitfalls in our white paper “This is how due diligence works.” It can be downloaded here: