Due diligence is the investigation and analysis a business or individual conducts prior to entering into any kind of transaction, for example, investing in an enterprise. Due diligence is required by law by companies looking to purchase assets or businesses. It is also required by brokers to make sure their clients are informed prior to signing an agreement.
Investors will usually perform due diligence in order to assess potential investments. This could include mergers, corporate acquisitions or divestitures. Due diligence can reveal hidden liabilities, such as legal disputes or outstanding debts that will be disclosed only after the fact, and could influence the decision to make an acquisition.
There are several types of due diligence, such as tax, financial, and commercial 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 investigation examines the financials of a business to make sure that there aren’t any accounting irregularities, and the company is on solid financial ground. Tax due diligence focuses on the tax exposure of a company and uncovers any tax owed.
Usually due diligence is restricted to a time frame that is negotiated, known as the due diligence period in which buyers are able to evaluate the potential purchase and ask questions. Depending on the type of deal the buyer might require specialist help to conduct this research. For example environmental due diligence may consist of the list of environmental permits and licenses that a company holds, while financial due diligence could include a review performed by certified public accountants.