Due diligence is the process of investigation and analysis a business or individual conducts prior into any kind of transaction, for example, investing in a business. The process is generally mandated by law for businesses seeking to purchase other businesses or assets, as well as by brokers who wish to ensure that their client is fully aware of the details of a transaction prior to signing a contract.
Due diligence is a requirement for investors when evaluating potential investments, which may include an acquisition or merger, or even a divestiture. Due diligence can uncover undiscovered liabilities, such as legal disputes or outstanding debts that would be revealed only after the fact, which could influence a decision to close an agreement.
There are several types of due diligence, including tax, financial and commercial due diligence. Commercial due diligence focuses on a company’s supply chain and its market analysis and its growth prospects. Financial due diligence review examines the financials of a business in order to ensure that there aren’t any accounting irregularities, and that the company is on sound financial footing. Tax due diligence studies the tax link exposure of a company and uncovers any tax liabilities.
Due diligence is usually limited to a set period of time, also known as a due diligence period during which buyers might evaluate a possible purchase and ask questions. Depending on the deal type the buyer may require specialist help to conduct the research. For instance, environmental due diligence may consist of a list of all environmental permits and licenses a company holds, while financial due diligence may involve a review by certified public accountants.