Due diligence is a term that is frequently used in the world of business. It is a term used to describe the act of acting with care and be cautious. Investors looking to reduce risk do their own due diligence before making an investment, broker-dealers make sure to inform the other party of all information about the transaction to ensure that they are not held responsible and companies who are contemplating acquiring another business must conduct due diligence on the other side prior to concluding the deal.
This article examines the different types due diligence and their relationship to the overall process.
The first, and most basic type of DD is a regulatory due diligence. This involves examining the compliance or legal risks that is associated with the transaction. This kind of DD can be especially important for industries with high regulatory requirements, such as finance and healthcare in which a failure to adhere could result in what is a vdr virtual data room fines, penalties or even shut down.
Financial due diligence (FDD) is the most commonly used form of DD and is a method of determining whether the financials contained in the Confidentiality Information Memorandum are true. It is the process of looking over all financial statements, including liabilities, assets and cash flows. FDD also reviews contracts and agreements, including partnerships and licensing agreements, term sheets, loan and bank financing agreements, and many more.
Administrative due diligence is a kind of due diligence that concentrates on administrative issues. For instance, this kind of DD looks at the number of facilities that are owned or leased by a company, the occupancy rates of those facilities, as well as the staffing levels. It may also require examining employment contracts, nondisclosure agreements, non-solicitation contracts, as well as other documents related to human resources.