Due diligence refers to the comprehensive process of conducting thorough research into aspects of a target company prior to acquisition or investment to inform prudent decision-making.
Key Analysis in Due Diligence:
- Financial reviews verify the accuracy of historical performance and the soundness of projections
- Operational evaluations assess production efficiency, management strengths and weaknesses, clients, etc.
- Legal due diligence identifies compliance risks and undisclosed litigation that could impair valuation
Example:
By meticulously investigating a manufacturing firm’s intellectual property during due diligence, the PE fund averted purchasing problematic technology that may have embroiled their portfolio company in expensive lawsuits.
Key Takeaway:
Prudent due diligence mitigates post-completion risks by surfacing issues for negotiation or terminating deals, saving larger losses from undiscovered problems down the line. The scope depends on transaction size and complexity.