Due diligence is an investigation of a business or person prior to signing a contract, or an act with a certain standard of care. It can be a legal obligation, but the term will more commonly apply to voluntary investigations. A common example of due diligence in various industries is the process through which a potential acquirer evaluates a target company or its assets for an acquisition. The theory behind due diligence holds that performing this type of investigation contributes significantly to informed decision making by enhancing the amount and quality of information available to decision makers and by ensuring that this information is systematically used to deliberate in a reflexive manner on the decision at hand and all its costs, benefits, and risks.
Due diligence takes different forms depending on its purpose:
- The examination of a potential target for merger, acquisition, privatization, or similar corporate finance transaction normally by a buyer. (This can include self due diligence or “reverse due diligence”, i.e. an assessment of a company, usually by a third party on behalf of the company, prior to taking the company to market.)
- A reasonable investigation focusing on material future matters.
- An examination being achieved by asking certain key questions, including, how do we buy, how do we structure an acquisition, and how much do we pay?
- An investigation of current practices of process and policies.
- An examination aiming to make an acquisition decision via the principles of valuation and shareholder value analysis. [3]
The due diligence process (framework) can be divided into nine distinct areas.
- Compatibility audit.
- Financial audit.
- Macro-environment audit.
- Legal/environmental audit.
- Marketing audit.
- Production audit.
- Management audit.
- Information systems audit.
- Reconciliation audit.
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We at Chartered Accountant India our client on due diligence to optimize its objective.
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