Due diligence refers to the individual or company’s research and analysis of data prior to entering into a transaction such as investing in a company or buying a piece of property. Due diligence is required by law for companies who want to buy other assets or businesses. It is also required by brokers to make sure their customers are fully aware prior to approving URL any transaction.
Investors will usually perform due diligence to analyze potential investments. This could include corporate acquisitions, mergers, or divestitures. Due diligence can reveal hidden liabilities, like legal disputes or outstanding debts that would be disclosed only after the fact, and could influence a decision to close an acquisition.
Due diligence can be classified into three categories: financial, commercial tax, and financial due diligence. Commercial due diligence is focused on a company’s supply chain and its market analysis and its growth prospects. A financial due diligence study 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 analyses the tax exposure of a firm and uncovers any tax liabilities.
Most of the time due diligence is restricted to a time frame that is negotiated, called the due diligence period, during which a buyer can look at the potential purchase and ask questions. Depending on the type of deal, a buyer may require expert assistance to conduct this study. For example an environmental due diligence could focus on the list of all environmental permits and licenses a company holds, while a financial due diligence might include a review conducted by certified public accountants.