What Is Due Diligence?

Due diligence is a process in which you review the information carefully prior to making any major commitments or purchases. It allows you to weigh the benefits against risks and make an informed and financially sound decision.

While the specifics of due diligence are different based on transaction type, there are some essential steps for each transaction:

Commercial Due Diligence

This includes a thorough review of the business operations, including customer relations and sales strategies or growth prospects. It is crucial to understand the financial strength of the target business and market position to accurately assess the value of the deal and ensure it will benefit everyone involved.

Tax Due Diligence

This section examines the tax profile of the acquiring company, with a focus on non-income taxes, such as usage and sales as well as payroll, property and transfer taxes. It also examines the tax implications on the purchase, such as how it should be structured and the best way to limit potential liabilities.

Representations and Warranties

Before a company’s IPO is announced, lawyers as well as underwriters and the company themselves conduct due diligence in order to verify the accuracy of the documents it has filed with the SEC. To spot any potential issues, key employees of the company and the C-suite of the target the company to discuss everything from intellectual property to revenue forecasts. This isn’t exactly the same as performing due-diligence on potential customers, but is a crucial part of ensuring that all documents and data are current and complete before the DDQ.


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