Definition of Due Diligence, Types and Objectives

Due diligence is a term in the investment world that is often used by businesses, company owners, and investors. This term is used to carry out an examination before two business parties make a decision. This process requires a lot of examination into the roots of the business.

Carrying out the due diligence process is very important so that all parties do not make the wrong move. To find out more about the due diligence process and its objectives, see the explanation below.

Understanding Due Diligence

Due diligence is an audit, investigation and performance review process carried out by business people in looking for data and facts about something that is being considered. This process is carried out by many parties, starting from legal representatives, finance managers, investors and the company.

In the world of business and investment, the due diligence process will also examine financial reports from the beginning to the most recent period. Those who examine a company will also look at the employee recruitment system as well as the products made and marketed.

The due diligence process can also differ depending on the approach, there are soft and strict checks. Soft audits use a qualitative approach and look at other aspects, such as management and the people within the company.

On the other hand, due diligence with a stricter process will only look at the numbers and data found. The test party will use fundamental analysis to see the financial condition of a company. This means that manipulation in providing data can be very minimal

Types of Due Diligence

The due diligence process can be seen from its objectives. The following are the types of due diligence that can be carried out in business.

1. Commercial due diligence

This process will consider the company's targets and position in the market. Examiners will also see the company's growth opportunities from many aspects. These include raw material supply, distribution, research and development, as well as employees within the company.

2. Legal due diligence

This test ensures that the company has everything it needs in terms of legal aspects. This process will also check the legitimacy and registration process of intellectual property rights owned by the company. That way, all parties are sure that the company being audited has been established legally.

3. Financial due diligence

The financial testing process will carry out an audit of a company on its financial reports and bookkeeping. This will ensure that there is no backlog in any type of financial flow, both incoming and outgoing.

4. Tax due diligence

This process is carried out to see whether the company has ever been in arrears on taxes or has not paid according to its obligations. Not only that, this test can also assess the company's position so that it can reduce the tax burden in the future.

5. Environmental due diligence

Now many companies are being tested for their responsibility towards the environment. The examiner will see a report from the company regarding its history regarding waste and exhaust gases. Apart from that, companies will also be held accountable for compliance with environmental standards in their surroundings.

Due Diligence Objectives

Carrying out checks and tests on many aspects of the business will of course provide benefits for the company itself. The following is the purpose of carrying out the due diligence process.

1. Check legality and legal status

The company has obligations to many parties, one of which is applicable law. By carrying out an inspection, you can see legal aspects that have not been fulfilled. This will also help you carry out the legal process to enable the company to operate comfortably.

2. Minimize reporting errors

It is possible that there are parties within the company who make distorted reporting. That way, you can take steps first before taking further business steps.

3. Convince investors

All deficiencies can be overcome immediately after knowing them. Once repaired, you can immediately negotiate with potential investors. Prospective investors will also be more confident about investing in companies that comply with the law, financial reports, target market and wider society.

That's the meaning and types of due diligence. Considering that the due diligence process also touches other financial and economic aspects, it is a good idea for you to also understand how to analyze your finances well. The Financial Analysis program will provide many new insights and insights regarding financial reporting and analysis needs.