Due Diligence
The term due diligence, which is the opposite of "negligence," is defined as "the care and attention required to fulfill a legal obligation properly" or "the diligence shown by a person to avoid an obligation."
In the business world, due diligence refers to the process of research and investigation carried out on the past, present, and foreseeable future of a target company to evaluate potential risks and outcomes before M&A (mergers and acquisitions) transactions. More broadly, due diligence encompasses not only the investigations conducted but also the execution and monitoring of the M&A transaction process. This includes the examination, investigation, analysis, and evaluation of the target company's financial records, operational and legal status, the validity of all asserted findings, and all factors affecting the acquisition decision and price. Therefore, due diligence is a systematic special effort aimed at providing accurate information about the target company to the potential buyer, preventing the buyer from making erroneous investments.
Generally, the types and scopes of due diligence are as follows:
- Financial Due Diligence: Examination of the target company's financial statements, cash flows, debts, and receivables.
- Legal Due Diligence: Evaluation of the company's legal status, agreements, litigation, and legal risks.
- Operational Due Diligence: Analysis of the company's operational processes, efficiency, and effectiveness levels.
- Tax Due Diligence: Examination of tax liabilities, past tax payments, and potential tax risks.
- Technical Due Diligence: Assessment of the company's technical infrastructure, technology usage, and technical risks.
- Environmental Due Diligence: Review of the company's environmental impacts and sustainability policies.
As seen above, due diligence investigations should be carried out by a team of experts, including lawyers, auditors, financial advisors, and engineers. This expert team provides the buyer with accurate and reliable information by thoroughly examining all aspects of the target company.