Hard Due Diligence & Soft Due Diligence: Know the Differences

Mar 14, 2024

Due diligence is a critical component of the transaction process in a corporate merger or acquisition. The primary purpose of IT due diligence is to uncover potential IT risks and opportunities that may affect a buyer's investment. This entails developing a clear and comprehensive image of a company's IT capabilities. 

Before executing a merger or acquisition, the IT due diligence team is responsible for appraising a company's value in both tangible and intangible assets and possible hazards that may arise after the transaction is completed. Furthermore, they might acquire the help of commercial litigation lawyer Adelaide for a smooth process.

There are two forms of IT due diligence: soft and hard. While these two processes share many similarities, there are also key differences.

What is Due Diligence?

Due diligence is the research and analysis of an organisation before entering into a deal, whether with a client, vendor, or third party. This proactive technique examines issues that may influence the firm, preventing serious problems in the enterprise arrangement. 

For example, due diligence in mergers and acquisitions entails investigating pending litigation, financial stability, labor relations, and sales.

Importance of Due Diligence

Due diligence plays a vital role in the following matters:

Who can perform due diligence?

In general, due diligence can be performed by multiple parties involved in a transaction or decision-making process. Several of these parties include:

Specifically, legal teams and a commercial litigation lawyer Adelaide evaluate contracts, identify legal issues, and assure regulatory compliance with the transaction in Australia.

These could be businesses or individuals looking to invest by evaluating the target company's risks, financial health, and potential.

Certified public accountants (CPAs) and accounting companies are often used to examine financial records, verify financial statements, and detect accounting problems.

Companies or individuals selling an asset or business might conduct due diligence to fully understand potential liabilities before entering into a transaction.

Financial analysts or consultants often help buyers and sellers with due diligence by contributing their financial analysis, risk assessment, and market research knowledge.

Typically, such parties collaborate to examine information, evaluate risks, and make informed decisions based on their findings during the due diligence.

What is Hard Due Diligence 

It focuses on the figures and data in financial documents such as the balance sheet and income statement. This can include conducting basic research and using financial ratios to assess a company's financial situation and generate future estimates. 

This due diligence can also identify accounting discrepancies or red flags; nevertheless, hard due diligence, based on mathematics and laws, is prone to overly optimistic interpretations by motivated sellers. Soft due diligence serves as a counterpoint when numbers are altered or exaggerated.

Soft Due Diligence

Soft due diligence is a qualitative technique considering management quality, internal company culture, and customer loyalty. Many factors influence business performance that figures cannot fully convey, including employee connections, corporate culture, and leadership. 

When M&A deals fail, the human factor is frequently disregarded.

Conclusion

While hard and software due diligence have the same basic purpose of examining the risks and possibilities connected with a business transaction, they operate in separate domains and require different skill sets and approaches by a commercial lawyer Perth WA

Hard due diligence focuses on financial and operational factors, whereas software due diligence investigates a company's technological infrastructure and digital assets.