Types of Due Diligence
As due diligence is such an in-depth inspection, there are many different types of due diligence that can apply, namely, administrative, financial, HR, legal, environmental... etc. The importance of each will vary according to the industry and the type of transaction. When done properly, each type of due diligence will support and inform the parties for an integrated approach. Ultimately, all the different types of due diligence have the same end goal. They provide businesses with the information they need and the confidence that the transaction is worth pursuing. Let’s have a quick overview at the most common ones:
1- Commercial Due Diligence
Commercial due diligence (also called market due diligence) is a critical step in validating the strategic aspects of an opportunity. It aims to assess the financial viability and real value of a business transaction. It also analyzes budgets, profit margins, capital adequacy, fixed and variable costs, loans, competing companies and so on. Without commercial due diligence, neither party can claim to know the relative position of the business, whether there are any impending threats to the business model, or how to navigate the post-deal industry landscape with success.
Our approach to commercial due diligence at al-Rustom law firm is adapted to individual client requirements. By focusing on key issues crucial to the investor, we enable our clients to both address potential market risks in the target’s valuation and recognize the target’s unrealized growth potential.
2-Financial Due Diligence
Financial due diligence, also known as accounting due diligence, is a crucial assessment of the financial health of a business. The aim of this process is to establish future forecasts and identify any potential risks. Analyzing a target company’s relevant sources of value and risk can greatly promote an investor’s chances for a successful business transaction. We start by putting the company’s historical and current financial performance under the microscope so we can determine whether the financial information is true and accurate.
After all, our Financial Due Diligence approach is tailored to support the deal decision making, negotiation, and eventually, post-announcement planning and execution, mainly targeting valuation related aspects of the deal. Ultimately, this helps the buy-side to get a better understanding of the company’s core performance metrics and act accordingly.
3- Administrative Due Diligence
In an effort to ensure that operational and administrative costs are covered in the financial deal, we conduct an administrative due diligence study through which we inspect the facilities of a company (such as occupancy, facilities, workstations… etc.) to see if all the active costs are presented in their financial statements or not. This can also help identify any potential costs for expanding or downsizing the operation following the acquisition. Al-Rustom law firm also ensures our administrative due diligence service gives the investing company a picture of the operational costs it would incur if it goes forth to pursue expansion of the target company.
4- Asset Due Diligence
Asset due diligence is a process that requires a complete a physical check of a company’s assets, which not only include real estate but any machinery, plant equipment, vehicles and other items that are owned or used by the business. Based on this in-depth examination we come up with comprehensive report covering a detailed schedule of fixed assets and their locations, a detailed list of sales and purchases of major capital equipment of the past three to five years, mortgages, real estate deeds, title policies and use permits. We will also look at lease deals, outstanding payments and even the condition of assets, as well as documenting the current value of them.
5- Human Resources Due Diligence
With staff being the most precious asset of any business, HR due diligence is an extensive process that’s as critical as financial due diligence. Based on the size of the workforce and the complexity of their contracts, auditors will look at the total number of employees, salaries and bonuses paid in the past three years, and all contracts between the business and its employees. Employee grievances, issues, ongoing disputes, and the annual sick and holiday leave of employees will be analyzed as well. Human Resources due diligence will not only look at existing contracts but also consider the future impact of any outstanding action between the business and its workforce.