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Types of Due Diligence

Due diligence is a key process in many types of business transactions, including mergers and acquisitions (M&A), venture capital or private equity investments, and the initial public offering. Due diligence is also required for many financial transactions, like loans and mortgages. In the due diligence phase it is essential that companies perform thorough checks to avoid unpleasant surprises after the deal has been concluded.

However, there are many kinds of due diligence, and each one requires a different approach. Some of the most common kinds of due diligence include:

A review of financial documents and records such as balance sheets and profit-and-loss statements. In most cases, this will involve the review of contracts related to tangible assets, such as equipment and vehicles. It may also include a review of a company’s tax position, in order to identify potential tax risks and opportunities.

Legal due diligence consists of reviewing the corporate’s consolidated legal structure, ownership arrangements, as well as current and old corporate documents. It’s also important to consider any litigation that is pending or threatened, as well as any settlements and judgments.

Regulative due diligence is the process of evaluating the compliance of a company’s target to laws and regulations from the government. This is especially crucial in industries that are heavily regulated like healthcare or finance. This type of due diligence usually includes an examination of the company’s permits, licenses, and regulatory compliance history. Additionally, it can also evaluate the company’s adherence to industry standards and best practices. It is often necessary to seek the help of experts or advisory firms for this kind of due diligence.

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