What Is Due Diligence?

No matter if you’re buying a brand-new property or starting a business due diligence is the practice of carefully examining information prior to making a major purchase or commitment. It allows you to evaluate the benefits and risks and come to a decision that’s financially sustainable and strategically sound.

While the specifics of due diligence vary by transaction type, there are a few critical steps for each type of transaction:

Commercial Due Diligence

This includes a review of the business operations, including customer relations and sales strategies, as well as growth potential. The goal is to understand the market position of the target company and financial check this site out strength, allowing for a precise valuation and ensuring that the transaction will benefit all parties.

Tax Due Diligence

This examines the tax profile of the company that is being targeted, focusing on income and non-income taxes such as sales and use, employment/payroll property, transfer taxes(opens in a new tab). It also examines the impact of tax issues on the purchase. This includes how to structure the purchase and how to reduce potential liabilities.

Representations and Warranties

Before an IPO is disclosed, lawyers and underwriters, as well as the company themselves perform due diligence to verify the accuracy of the information it filed with the SEC. To identify potential pitfalls, key employees of the company and its C-suite interview the company to discuss everything from intellectual property to revenue forecasts. This isn’t the same as doing due diligence on customers, but it is an important step to ensure that all information and documents are correct and current prior to the DDQ is issued.