What is due diligence?

From a dealmaking perspective, due diligence considers a deal from a broad set of dimensions to evaluate its assets, identify its risks and assess its longer-term commercial protentional. The information and insights provided through due diligence can help dealmakers determine if an investment can deliver their strategic and financial objectives.

Traditionally, due diligence considers the financial, legal, operational and strategic aspects of a deal. This isn't enough for many of today's dealmakers. Faced with increasing pressures to maximize their investments and create long-term business value, while contending with ever-changing market conditions, geopolitical tensions and evolving technologies, dealmakers should consider a deal with a far more dynamic lens.

At KPMG, due diligence is specific to the client and the target they are assessing or the business they are selling. It will include traditional risk focused due diligence like financial, operational, tax and legal. It may also include an assessment of digital applications and technologies, ESG, cyber security, people and change, and more.

To add even more dimension, due diligence at KPMG considers the financial and operational levers in a business to identify potential opportunities that can create value for the business. 

KPMG professionals consider a wide aperture of risks to assess during the due diligence process. This article seeks to break down some of the areas that member firms assess during due diligence. We continue to evolve this list to reflect the client, the specific target as well as sector and market forces.

• Financial due diligence delves into the financial records of the target company, ensuring the accuracy of reported earnings, the robustness of financial forecasts, and the integrity of internal controls. We also apply analytics and benchmarking to identify financial upside opportunities within the target.
• Legal due diligence focuses on the legal risks, including pending or potential litigation, compliance with regulations, intellectual property issues and contractual obligations.
• Operational due diligence Assesses operational aspects of the target, from the quality of the assets and the state of the infrastructure to the efficiency of the operations and the technology in use.
• Strategic due diligence Evaluates the strategic objectives of the transaction, analyzing market trends, competitive positioning and growth opportunities.
• Digital due diligence assesses the financial and non-financial digital assets, analyzing large-scale, digitally retrievable information using data analytics and machine learning algorithms.
• HR due diligence considers a target company's human capital, remuneration policies and retention arrangements. KPMG professionals help dealmakers identify payroll compliance issues, Enterprise Bargaining Agreement compliance, HR mapping of Human Capital policies, and how the people aspects of a merger are considered.
• Cyber due diligence contemplates a target company's cyber security strategy and how they maintain privacy of company and customer data. This way dealmakers can identify vulnerabilities and how to solve for critical gaps.   
• ESG due diligence assesses ESG risks, liabilities and opportunities for a target, which may help identify and mitigate potential risks around reputation, regulatory challenges and financial impacts.
• Synergy and separation due diligence considers the costs and benefits of mergers and demergers that need to be factored into the deal makers' valuation thesis. 

We aid deal makers to plan and execute acquisition mergers and divestments, through providing detailed execution plans and program management.

Due diligence from KPMG firms is not just an opportunity to identify risks. It's a chance to identify potential opportunities to create value at a very early stage in the deal cycle. This dual approach that assesses both risks and opportunities, offers dealmakers a strategic tool that can:

• Shape the negotiation process and ensure a fair, competitive price for a deal · influence the final deal structure 
• Pre-empt potential impediments that can impact a deal's value · ensure the investment thesis is sound and sustainable 
• Focus management on the areas of a business that can generate long-term business value 
• Offer the insights to make confident decisions with conviction

If you have questions about due diligence for your business, contact your local KPMG leader.