Due diligence refers to the company’s or individual’s research and analysis of data prior to committing to a transaction, such as investing in a business or buying a piece of property. The process is generally mandated by law for companies seeking to buy other assets or businesses and by brokers who wish to ensure that the client is fully informed of the specifics of a transaction prior to committing to it.
Due diligence is a requirement for investors when looking at potential investments, which may include an acquisition, merger or divestiture. Due diligence can uncover hidden liabilities such as outstanding debts and legal disputes that can only be made public after the fact. This could affect the decision to close a transaction.
Due diligence can be classified into three types: commercial, tax, and financial due diligence. Commercial due diligence is focused on the supply chain of a firm and market analysis as well as its growth prospects, while a financial due diligence investigation examines a company’s financial books to make sure there aren’t any accounting irregularities and that it is on solid financial footing. Tax due diligence analyzes the tax exposure of a company and determines if there are any outstanding tax.
Most of the time due diligence is limited to a negotiated timeframe, called the due diligence period, in which buyers are able to examine the potential purchase and ask questions. Depending on the deal type top performing digital room companies the buyer might require specialist help to conduct this investigation. For instance an environmental due diligence could consist of the list of environmental permits and licenses the company is able to obtain, while the financial due diligence might include a review performed by certified public accountants.
