What is due diligence?

For businesses, especially those on the rise, doing due diligence is a must. With so many moving parts – stakeholders, resources, and complex processes – it’s important to cover all the bases. Taking the time to dig into the details helps reduce risks and set the stage for successful deals or partnerships.

In this guide, we’ll cover:

• What is the meaning of due diligence?
• What does good due diligence involve?
• What is due diligence in business?
• Types of due diligence
• The difference between due diligence and auditing
• How to perform due diligence for suppliers in hospitality and healthcare
• How Dojo can help
• FAQs

Getting started: What does due diligence mean?

Due diligence is the process of thoroughly evaluating a business or individual before entering a deal or agreement. 

The why behind it: What’s the purpose of due diligence

So, why do we do due diligence? The main aim of due diligence is to give decision-makers peace of mind by spotting potential risks and liabilities. This process ensures everything is looked at before any agreement is finalised, providing extra confidence and security.

The gold standard: What does good due diligence involve?

Good due diligence rests on several key pillars:

• Systematic approach: Due diligence should be well organised and follow a clear process. This usually involves checklists, standardised procedures, and clear guidelines.

• Thorough investigation: Every detail matters in due diligence. This includes taking a close look at financial statements, operational practices, legal compliance, and market conditions. 

• Risk mitigation: From spotting obvious risks to understanding the subtle or indirect threats. This helps decision-makers address potential issues before they escalate.

• Validation of assumptions: Ensure all early assumptions are accurate and based on evidence. This means double-checking projected revenues, cost structures, and growth potential.

• Legal and regulatory compliance: Businesses need to follow all relevant laws and regulations. This means revisiting existing contracts, licences, permits, and any ongoing or potential lawsuits.

• Cultural and operational fit: It's important to understand how compatible the cultures and operations of the involved parties are. This ensures smoother integration and better teamwork after the deal.

• Stakeholder analysis: Looking at the interests and influences of different stakeholders including employees, customers, suppliers, and shareholders. 

• Technology and innovation assessment: Evaluate the business’s tech capabilities and innovation potential – from intellectual property and tech infrastructure to innovation pipelines.

Corporate clarity: What is due diligence in business?

Types of due diligence

• Financial due diligence: This involves examining financial statements, cash flow, and profitability to ensure the business is financially sound.

• Commercial due diligence: These checks are made around market conditions, competition, and customer demographics to see how viable and promising the business really is.

• Operational due diligence: This is where the day-to-day operations, processes and efficiencies are analysed.

• Legal due diligence: This involves reviewing legal documents, contracts, and checking compliance with regulations.

• Environmental due diligence: Find out how business operations impact the environment.

Qualitative vs quantitative: Hard vs. soft due diligence

Hard due diligence focuses on solid facts like financial data and legal contracts, providing legal protections.

Soft due diligence uncovers potential risks and opportunities in the company’s culture and management practices. 

Combining both approaches in your due diligence process ensures a complete and well-rounded picture.

All about timing: The difference between due diligence and auditing

While both processes involve thorough evaluations, due diligence is typically done before entering a transaction to assess risk, while auditing is a regular review to ensure ongoing compliance and accuracy.

In practice: How to perform due diligence for suppliers

What is due diligence in hospitality and what does it look like in practice? Check out our due diligence restaurant example below.

What is due diligence in a restaurant?

1. Financial checks: Check the supplier’s financial health by reviewing their financial statements and credit history. This helps ensure they can consistently provide the ingredients and materials needed.
2. Operational practices: Make sure the supplier can deliver fresh, high-quality ingredients on time. Look into their sourcing practices and check for any certifications they might have, like organic or fair trade.
3. Legal compliance: Ensure the supplier follows food safety regulations, health standards, and has all the necessary certifications and licences.
4. Environmental impact: Check out the supplier’s sustainability practices – like how they handle packaging, waste, and sourcing – to ensure they match your restaurant’s environmental goals.

What is due diligence in healthcare?

Working in the health sector? Check our dental service example below. 

1. Financial checks: Look over the supplier’s financial statements to make sure they are financially stable and able to provide a steady, long-term supply of dental materials and equipment.
2. Operational practices: Check if the supplier can deliver high-quality dental products – like implants, instruments, and consumables – on time. Look at their track record with other dental clinics and how they handle urgent orders.
3. Legal compliance: Make sure the supplier follows regulations on medical devices, dental materials, and patient confidentiality. Check that they have all the necessary certifications and licences for their products.
4. Environmental impact: Take a look at the supplier’s environmental policies, including how they manage medical waste and handle hazardous materials, to make sure they align with your practice’s values and meet regulatory requirements.

Disclaimer: Please note that this article is intended for educational purposes only and should not be deemed to be or used as legal, employment, or health & safety advice. For guidance or advice specific to your business, consult with a qualified professional.