Due diligence is the term used to describe the company’s or individual’s research and analysis of data prior to entering into a transaction for example, investing in a company or purchasing a piece property. This type of investigation is typically required by law for companies seeking to purchase other assets or businesses and by brokers who wish to ensure that the client is fully informed about the specifics of a deal before agreeing to it.
Due diligence is the process that investors usually follow when evaluating potential investments, that could include a corporate acquisition either through merger or divestiture. This process may reveal hidden liabilities like legal disputes and outstanding debts that can only be later on. This could influence the decision of whether to close a transaction.
There are many types of due diligence. These include the tax, financial, and commercial due diligence. Commercial due diligence focuses on the supply chain of a business, market analysis and growth prospects while a financial due diligence study examines the company’s financial records to be sure there aren’t any accounting irregularities and is on solid financial footing. Tax due diligence examines the tax liabilities of a business and identifies any outstanding tax.
Most of the time due diligence is restricted to a negotiated timeframe, known as the due diligence period where buyers can assess the purchase and ask questions. Depending on the type of deal, a buyer may require specialist involvement to perform this study. Due diligence on environmental concerns could include the list of environmental permits and licenses issued by a company, whereas due diligence on financial issues may require an audit conducted by certified public accounting firms.