What Is Due Diligence?

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Due diligence is the process in which you take the time to review all information before making any major purchases or commitments. It allows you to weigh the advantages against the risks and makes a decision that is financially sound and strategically sound.

Due diligence is different based on the nature of the transaction, but there are some critical steps for each transaction:

Commercial Due Diligence

This examines business operations, such as customer relationships strategies for sales, growth prospects. It is crucial to understand the financial strength of the target business and market position in order to accurately evaluate the deal and ensure it will benefit everyone involved.

Tax Due Diligence

The analysis examines the tax profile of the target company with a focus on income and other taxes like payroll and employment, property, and transfer taxes(opens in new tab). It also analyzes the impact of tax issues relating to the acquisition, as well as how to structure it, and how to reduce any potential liabilities.

Representations & Warranties

Before an company’s IPO, attorneys, underwriters as well as the company itself undertake due diligence to ensure that the representations in its filings with the SEC are accurate. In this regard process, the company being targeted is questioned by key employees and C-suite executives to discuss everything from the development of products to intellectual property to revenue projections, with the goal of identifying any potential mistakes that could undermine the deal. This isn’t the same as conducting due diligence on clients, but it is a vital step in ensuring that all documents and data are current and accurate prior to the DDQ.