Due Diligence
All Terms
What is Due Diligence?
Due diligence is a comprehensive appraisal of a business undertaken by a prospective buyer to evaluate its assets, liabilities, and overall financial health. This process aims to confirm all material facts and assess the potential risks and benefits associated with a transaction.
Key Areas of Due Diligence
- Financial Review: Examination of financial statements, tax records, and cash flow.
- Legal Compliance: Verification of legal documents, contracts, and compliance with regulations.
- Operational Assessment: Analysis of business operations, management, and workforce.
- Market Analysis: Evaluation of market position, competition, and industry trends.
Common Issues
Common issues in due diligence include inaccurate financial statements, which can misrepresent the company's financial health, and hidden liabilities, such as undisclosed debts or pending legal actions. Regulatory risks can arise if the company is not fully compliant with laws and regulations, leading to potential fines or operational restrictions. Operational inefficiencies, such as outdated processes or weak management, can affect future performance and profitability.
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Related Terms
Adjusted EBITDA
Adjusted EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization) is a financial metric used to assess a company's operational performance. It modifies the standard EBITDA by excluding non-recurring, irregular, or non-cash expenses to provide a more accurate reflection of ongoing profitability.
Angel Investors
Angel investors are affluent individuals who provide capital to startups or early-stage companies in exchange for equity ownership or convertible debt. These investors often offer not only financial support but also valuable business expertise and mentorship.
Anti-Dilution Provision
An anti-dilution provision is a clause in an investment agreement that protects an investor from dilution of their ownership percentage in the event that new shares are issued at a price lower than the investor originally paid. It is commonly included in venture capital and private equity agreements.
Bootstrapping
Bootstrapping in business refers to starting and growing a company using personal finances or the company’s operating revenues, rather than relying on external funding or venture capital. Entrepreneurs use their own resources and reinvest profits from initial sales to fund further growth, emphasizing financial independence and careful cash flow management.
Bridge Loan
A bridge loan is a short-term loan used to meet immediate financing needs while waiting for more permanent funding. It serves as a temporary solution to bridge the gap between the need for funds and the availability of long-term financing.
Cap Table
A Cap Table, or Capitalization Table, is a detailed spreadsheet or document that outlines the equity ownership, types of shares, and ownership percentages of a company. It includes information on founders, investors, and employees, as well as the dilution of shares over time through various funding rounds and option grants.
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