Due diligence is the process of investigation and analysis that a company or individual conducts prior into any transaction, such as investing in an enterprise. Due diligence is required by law for companies who want to buy assets or businesses. It is also required by brokers to make sure their customers are fully informed prior to signing the transaction.
Investors usually conduct due diligence when looking at potential investments, which may include an acquisition, merger or divestiture. Due diligence can uncover hidden liabilities, for instance legal disputes or outstanding debts that could be disclosed only after the fact, and 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 types of due diligence on the supply chain of a business and market analysis as well as its growth prospects and a financial due diligence analysis examines the company’s financials to make sure there aren’t any accounting errors and is on a solid financial footing. Tax due diligence studies a company’s tax exposure and determines if there are any outstanding taxes.
Usually, due diligence is limited to a stipulated timeframe known as the due diligence period in which buyers are able to evaluate the potential purchase and ask questions. Depending on the deal type, a buyer might need specialist help to conduct the research. For instance, an environmental due diligence might focus on the list of all environmental permits and licenses the company has, while the financial due diligence might require a review by certified public accountants.