Types of due diligence

The three main categories of due diligence are legal, financial and
commercial. Although these have traditionally been distinct, the best due
diligence programmes maintain an element of close cooperation as the work
in one area can often inform the checks being carried out elsewhere. Many
practices now offer an integrated service that brings these strands together.

1. Legal

Legal due diligence seeks to examine the legal basis of a transaction, for
example to ensure that a target business holds or can exercise the
intellectual property rights that are crucial to the future success of the
company.

Other areas that would most likely be explored include:

legal structure

contracts

loans

property

employment

pending litigation.

2. Financial

Financial due diligence focuses on verifying the financial information

provided and to assess the underlying performance of the business.

This would be expected to consider areas such as:

earnings
 assets

liabilities

cash flow

debt

management

3. Commercial

Commercial due diligence considers the market in which a business sits, for
example involving conversations with customers, an assessment of
competitors and a fuller analysis of the assumptions that lie behind the
business plan. All of this is intended to determine whether the business plan
stands up to the realities of the market.

Other

Other types of due diligence cover areas such as taxation, pensions, IT

systems and intellectual property.

Area requirement for due diligence

CUSTOMER SATISFACTION: The customer satisfaction infrastructure has to be designed as an

integral part of the business and not simply included like a facade over the front door. The customer
satisfaction infrastructure defines the role of functions such as product support, requirements
definition, and quality assurance.

PRODUCTION/SERVICES: The production/services infrastructure defines the methods that will be

used for the delivery of all products and services and ensure that this is being done in a safe,
compliant, and consistent manner capable of bringing all products and services fully to market.
INFORMATION MANAGEMENT: It would be a tremendous understatement to say that all
businesses today are information intensive. The information management infrastructure defines the
methods for protecting all business data, the electronic tools that form the backbone of the business,
printed material and all media that is used to support the business. All personal privacy and security
controls need to be assessed here.

SALES AND MARKETING: The sales and marketing infrastructure defines the methods used for
everything from pricing and lead flow needed to support the sales pipeline to the methods used to
develop new products and markets including the use of competitive and strategic analysis as
assessment tools.

ORGANIZATIONAL: The definition of the organizational infrastructure includes the formal and
informal structure of the business. It includes the organization chart that forms the command and
control structure plus the informal structure that becomes the culture of the business.

PERSONNEL: The personnel infrastructure defines the working relationship between the business
and its employees and between employees including the roles and authority of the management
team. It defines the benefit strategy and compensation plan plus the procedures for hiring, firing and
everything in between.

FINANCIAL OPERATIONS: The financial operations infrastructure forms the framework for all
financial operations of the business. It defines all financial authority and controls including AP/AR,
payroll, cost account and project management, plus the definition of methods to be used for
budgeting and projections.

LEGAL OPERATIONS: The legal operations infrastructure forms the framework for all legal
operations of the business. It defines all legal authority, professional licensing and controls needed
to support the business on a continuing basis. It defines all activities used to protect the business
from legal risk and liabilities and to ensure the compliant operation of the business.

INSTITUTIONALIZED PROCESSES: The institutionalized processes infrastructure includes the

definition of all formalized policies, procedures and methods that guide the businesses operations.
Methods such as ISO, CMMI, Six Sigma, Enterprise Risk Management (ERM), Lean or Quality
Management Systems (QMS) and any areas where the business needs certification to qualify for a
market driven process are defined.