Due diligence refers to the investigation and analysis a business or individual conducts prior into any transaction, like investing in a business. Due diligence is required by law by companies that want to purchase other assets or businesses. It is also required by brokers to ensure their clients are aware prior to approving any transaction.
Investors typically perform due diligence to evaluate potential investments. This can include corporate acquisitions, mergers, or divestitures. Due diligence can uncover hidden liabilities, such as legal disputes or outstanding debts that would be revealed only after the fact, which could influence a decision to close a deal.
There are various types of due diligence, such as the tax, financial, and commercial due diligence. Commercial due diligence focuses on a company’s supply chain and market analysis as well as its growth prospects and a financial due diligence investigation examines a company’s financials to make sure there aren’t any accounting errors and is on solid financial footing. Tax due diligence focuses on the company’s tax exposure and determines if there are any outstanding tax.
Due diligence is typically limited to a specific time period also known as a due diligence period that a buyer may evaluate a potential purchase and ask any questions. Depending on the deal type one might require specialist help to conduct this investigation. For instance environmental due diligence may concentrate on the list of all environmental permits and licenses that the company is able to obtain, while a financial due diligence might include a review conducted by certified public accountants.
