Types of Due Diligence
Due diligence refers to the investigation and analysis a business or individual conducts prior to entering into any transaction, like investing in an enterprise. Due diligence is required by law for businesses that wish to purchase other assets or businesses. It is also required by brokers to make sure their customers are fully aware prior to approving any transaction.
Due diligence is a requirement for investors when evaluating investments which could be a corporate acquisition either through merger or divestiture. The process can uncover undiscovered liabilities, such as legal disputes or outstanding debts, which would be revealed only after the fact, and could influence the decision to make an agreement.
There are various types of due diligence. These include tax, financial, and commercial due diligence. Commercial due diligence is focused on a company’s supply chain, market analysis and growth prospects, while a financial due diligence analysis examines the company’s financial records to make sure there aren’t any accounting errors and is on a solid financial footing. Tax due diligence focuses on the tax exposure of a company and identifies any outstanding tax.
Most of the time due diligence is limited to a specified timeframe, called the due diligence period, in which buyers are able to examine the potential purchase and ask questions. Depending on the type of deal, a buyer may require expert assistance to conduct this study. A due diligence on environmental concerns could include a list of permits for environmental protection and licenses issued by a business, while a due diligence on financial issues might involve an audit by certified public accounting firms.