The importance of due diligence cannot be underestimated for any business operating in America. Any company whether listed or not must assess results from time to time. Owners, potential inventors, partners, and shareholders need to assess risk before investing in a business, and due diligence allows them to do that.
Hiring a consulting company Denver helps all the aforementioned stakeholders by researching, evaluating, and measuring business results. How consulting companies do it? Consulting companies review financial statements to do due diligence about the financial standing of a company. The metrics used by consultants can include profitability ratios, liquidity ratios, debt ratios, efficiency ratios, and price ratios.
What Is Due Diligence?
Due diligence is an evaluation, audit, or review performed to confirm the accuracy of the financial statements of the business. In the financial world, due diligence requires an examination of financial records before entering into a proposed transaction with another party.
In general, due diligence will have the following activities:
- Seeking operating redundancies that can be eliminated
- Reviewing potential or ongoing litigation
- Reviewing antitrust considerations
- Evaluating subcontractor and other third-party relationships
- Reviewing and auditing financial statements
- Scrutinizing projections for future performance
- Analyzing the consumer market
Types of due diligence you should know about:
- Financial due diligence
Financial due diligence seeks to confirm whether or not the financial statements showcased in the Confidentiality Information Memorandum (CIM) are accurate. Financial statements that will be closely examined include an Income Statement which lists revenue or the company’s net income or profit, also known as the bottom line. Balance sheet and Cash Flow statements.
- Asset due diligence
Asset due diligence typically focuses on a detailed schedule of fixed assets and their locations (in most cases, physical verification should be done). Furthermore, all lease agreements for equipment, a schedule of sales and purchases of major capital equipment during the last three to five years, real estate deeds, mortgages, title policies, and use permits are assessed.
- Tax due diligence
Tax due diligence examines different types of taxes that may be imposed upon your business. Over and above that, it looks at different taxing jurisdictions in which it may have sufficient connection to be subject to such taxes.
- Legal due diligence
In this type of due diligence process, a consulting company collects reviews and assesses all the legal risks. For instance, a consultant will review all the documents pertaining to a target company and interview people associated with it.