What Is Due Diligence?

Whether you’re purchasing a new house or a business due diligence is the practice of carefully examining information prior to making a major purchase or commitment. It helps you weigh the benefits against the risks and makes a decision that’s financially feasible and strategically sound.

While the specifics of due diligence differ based on transaction type, there are certain steps that are essential for each:

Commercial Due Diligence

This examines business operations such as customer relationships and sales strategies, as well as growth prospects. It is crucial to know the financial strength of the target business and market position to accurately value the deal and ensure that it will benefit everyone involved.

Tax Due Diligence

This examines the tax profile of the company that is being targeted with a focus on income and other taxes like payroll and employment, property, and transfer taxes(opens in new tab). It also analyzes the impact of any tax issues that might arise from the acquisition, including how to structure it, and how to reduce the risk of liability.

Representations and Warranties

Before a company’s IPO is made public, attorneys, underwriters and the company themselves carry out due diligence in order to confirm the accuracy of the information it submitted to the SEC. To avoid possible pitfalls, the top employees of the company and the C-suite of the target the company to discuss everything from intellectual property to revenue forecasts. This is not the exact equivalent of conducting due diligence on clients, but it is a crucial step in making sure that all documents and records are up-to date and complete prior to the DDQ.

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