Due diligence refers to a company’s or an individual’s investigation and analysis of information prior to committing to a transaction for example, investing in a company or purchasing a piece property. This type of investigation is typically required by law if a company wants to purchase other businesses or assets, as well as by brokers who wish to ensure that a client is fully informed of the details of a transaction before agreeing to it.
Investors typically perform due diligence when evaluating potential investments. This can include mergers, acquisitions, or divestitures. Due diligence can reveal hidden liabilities, like legal disputes or outstanding debts that will be disclosed only after the fact, which might affect the decision to close an acquisition.
There are many types of due diligence, including tax, financial, and commercial due diligence. Commercial due diligence focuses on a company’s supply chain and market analysis, as well as growth prospects and a financial diligence analysis looks at the company’s financial books to make sure there aren’t any accounting irregularities and is in good financial standing. Tax due diligence focuses on the tax liabilities of a business and uncovers any tax owed.
Usually due diligence is limited to a time frame that is negotiated, known as the due diligence period, during which a buyer can evaluate the potential purchase and ask questions. Based on the type of deal, a buyer could require expert assistance to conduct the due diligence. Due diligence on environmental issues could include an inventory of environmental permits and licenses owned by a company, whereas a due diligence on financial issues might require an audit by certified public accounting firms.
