Due Diligence (DD) is a term that comes from American law and business practice in commercial contracts. It is used in two basic ways. Especially in the USA, the term Due Diligence refers to usual care in trade between two companies. Especially in European countries, the term Due Diligence denotes a comprehensive audit, a review or depth monitoring of the enterprise. Due Diligence audit is usually done when selling the company, acquisitions, capital input of the majority investor or granting a credit due to a comprehensive review of its situation. Due Diligence result confirms the correctness of all the facts relevant to the sale and certainty to all stakeholders. This also applies to commercial contracts.
- Financial due diligence, sometimes accounting due diligence - the aim is to eliminate the risks of improperly maintained accounting or financial situation of the enterprise, financial due diligence means a comprehensive financial analysis of the enterprise
- Tax due diligence - the aim is to determine whether the enterprise complies with all legal obligations and identify potential risks due to incorrect payment of income tax or value added tax
- Market due diligence - the aim is to identify and assess the market potential and position of the enterprise on the market
- Legal due diligence - the aim is to assess the legal aspects of the enterprise, therefore the accuracy of labor relations, all commercial and financial relations, including property relations of the owners
- Operational due diligence - the aim is to determine the effectiveness of operations of the enterprise in relation to the business plan. The investor assesses whether the company is even able to achieve its plans
- Technical due diligence, sometimes technological due diligence - the aim is to determine the state of technology and technological potential of the enterprise
- Human resource due diligence - the aim is to identify potential of human resources and overall human capital of the enterprise
- Management due diligence - the aim is to assess the quality of management, sometimes referred to as management assessment
- Environmental due diligence - the aim is to verify standards compliance in the field of environmental protection. This applies particularly to those enterprises whose activities have an impact on the environment
Use of Due Diligence in practice: It is used for in-depth examination of the enterprise due to increase confidence and to reduce risks for the other party (investor, bank, business partner) within a commercial transaction. It is basically an audit with a clear goal. Depending on the type and size of the enterprise, type of business transaction, it is selected also the type and extent of due diligence.