Due diligence is the process of investigation and analysis a business or individual conducts prior to entering into any type of transaction, such as investing in an investment. Due diligence is required by law by companies who want to buy assets or businesses. It is also required by brokers to ensure their clients are informed prior to committing to the transaction.
Investors typically perform due diligence in order to assess potential investments. This could include mergers, acquisitions, or divestitures. The process can uncover hidden liabilities, like legal disputes or outstanding debts that could be disclosed only after the fact, which might affect the decision to conclude a deal.
There are a variety of due diligence. These include tax, financial and commercial due diligence. Commercial due diligence focuses on a company’s supply chain as well as its market analysis and its growth prospects. A financial due diligence review examines a company’s financial records to make sure that there aren’t any accounting irregularities, and the company is on sound financial footing. Tax due diligence studies the tax exposure of a firm and also identifies any tax owed.
Most of the time due diligence is restricted to a time frame that is negotiated, known as the due diligence period where buyers can assess the purchase and ask questions. Based on the type of deal one might require specialist help to conduct this study. Due diligence on environmental concerns could include a list of permits for environmental protection and licenses issued by a company, while due diligence on financial issues may require an audit conducted by certified public accounting firms.