Due diligence is the process of investigation and analysis a business or individual conducts prior to entering into any transaction, such as investing in an enterprise. This investigation is generally required by law for companies looking to purchase other businesses or assets as well as for brokers who wish to ensure that a customer is fully informed of the specifics of a transaction prior to signing a contract.
Investors usually conduct due diligence when evaluating potential investments, which could include a corporate acquisition either through merger or divestiture. The process can uncover undiscovered liabilities, such as legal disputes or outstanding debts that would be disclosed only after the fact, which could affect the decision to close a deal.
There are many types of due diligence. These include the tax, financial, and commercial due diligence. Commercial due diligence is focused on the supply chain of a business and market analysis, as well as growth prospects while a financial due diligence study examines the company’s financial books to make sure there aren’t any accounting irregularities, and to ensure that the company is in good financial standing. Tax due diligence analyzes the tax liabilities of a business and also identifies any outstanding tax.
Usually due diligence is limited to a time frame that is negotiated, known as the due diligence period in which buyers are able to look at the potential purchase and ask questions. Depending on the type of deal the buyer may require specialist help to conduct this study. Due diligence on environmental matters might include a list of permits for environmental protection collaboration and confidentiality: twin promises of VDRs and licenses owned by a company, whereas due diligence on financial matters might involve an audit by certified public accounting firms.
