Due diligence refers to a company’s or an individual’s examination and analysis of data before entering into a transaction such as investing in a company or purchasing a piece of property. Due diligence is required by law by companies looking to purchase other businesses or assets. It is also required by brokers to ensure their clients are informed prior to signing a transaction.
Investors usually conduct due diligence in order to assess potential investments. This could include corporate acquisitions, mergers, or divestitures. Due diligence can reveal hidden liabilities, such as legal disputes or outstanding debts, which would be revealed only after the fact, which could influence a decision to close a deal.
Due diligence can be divided into three types: financial, tax, and financial due diligence. Commercial due diligence is focused on a company’s supply chain and its market analysis and its growth prospects. A financial due diligence investigation examines the financials of a business to make sure that there aren’t any accounting irregularities, and the company is on sound financial footing. Tax due diligence studies a company’s tax exposure and determines if there are any outstanding taxes.
Due diligence is often limited to a time frame also known as due diligence during which buyers can evaluate a purchase and ask questions. Depending on the type of deal, a buyer could require specialist involvement to perform the due diligence. A due diligence on environmental issues might include the list of environmental permits and licenses owned by a firm, while a due diligence on financial matters might require an audit by certified public accounting firms.
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