What is Due Diligence?

In business law terms, due diligence refers to the process by which a company thoroughly investigates another company for the purpose of a business transaction such as an investment or acquisition. The main goal of due diligence is to disclose important information about a company as well as its potential legal liabilities. It is an important step in ensuring that certain business transactions are beneficial. Due diligence can be conducted on both legal and financial aspects of a company and is typically carried out by reviewing documents, interviewing employees, and researching the company’s intellectual property. 

Key Takeaways

• Due diligence is the process by which a company reviews documentation and other details about another company for the purpose of an investment or acquisition.
• Legal due diligence investigations may include intellectual property research, review of financial documents, and other key types of business due diligence. 
• In some cases, due diligence may be applied in other contexts such as conducting background checks on potential new employees.
• Due diligence can be divided into two main categories: hard due diligence and soft due diligence.

Hard vs Soft Due Diligence

Despite the fact that all due diligence procedures strive to uncover critical information about a company, there are many different ways in which the process can be conducted. In general, there are two main types of due diligence procedures: hard due diligence and soft due diligence. Differentiating between these two methods is an essential part of understanding due diligence in business law. 

Hard due diligence shines a spotlight on important numbers and data about a company found on financial documents such as income statements and balance sheets. While conducting hard due diligence, financial elements are examined in order to get a clear picture of a business’s financial status and make predictions for the company’s future. Those performing hard due diligence may also take a look at a company’s employment agreements, business model strategies and marketing plans.

Alternatively, soft due diligence takes a qualitative approach and focuses on factors such as a company’s management style, corporate culture and the loyalty of the business’s customers. While quantitative data can provide essential insight about a company, soft due diligence should not be overlooked. Simply put, soft due diligence aims to fill in the gaps that numbers simply cannot measure. According to a recent Harvard Business Review study, when merger and acquisition transactions fail, most of them do so due to a lack of consideration of important human elements.

Bottom Line

When it comes to any major business transaction, due diligence should not be overlooked. While in most cases due diligence is not technically required by law, it is highly recommended as it can provide valuable insight about a business. Moreover, it cultivates a comfortable environment and promotes awareness between the relevant parties in a number of important business deals. It should be noted, however, that it can be quite challenging to navigate the due diligence process. A licensed business attorney will ensure the procedure is carried out lawfully and efficiently. Contact a specialized business attorney today with Attorney At Law.