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Due Diligence Service

Updated:2017-10-28 15:42:59    Source:www.tannet-group.comViews:129

Due diligence is an investigation of a business or person prior to signing a contract, or an act with a certain standard of care. It can be a legal obligation, but the term will more commonly apply to voluntary investigations. It is a program of critical analysis that companies undertake prior to making business decisions in such areas as corporate mergers/acquisitions or major product purchases/sales.

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 programs 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 Due Diligence
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.

2. Financial Due Diligence
Financial due diligence focuses on verifying the financial information provided and to assess the underlying performance of the business.

3. Commercial Due Diligence
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.

Due Diligence Process
The first step in doing due diligence is to determine just how big the company is. The company’s market capitalization says a lot about how volatile the stock is likely to be, how broad the ownership might be and the potential size of the company's end markets. For example, large cap and mega cap companies tend to have more stable revenue streams and less volatility. Mid cap and small cap companies, meanwhile, may only serve single areas of the market, and may have more fluctuations in their stock price and earnings. When you start to examine revenue and profit figures, the market cap will give you some perspective.

Now that you have a feel for how big the company is and how much money it earns, it's time to size up the industries it operates in and who it competes with. Compare the margins of two or three competitors. Every company is partially defined by its competition. Looking at the major competitors in each line of business (if there is more than one) may help you nail down just how big the end markets for products are. Is the company being considered for investment a leader in its industry?

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