11 Nov Types of Due Diligence
Due diligence is the investigation and analysis a business or individual conducts before entering into any type of transaction, such as investing in the business. This investigation is generally required by law for businesses seeking to purchase other businesses or assets, as well as by brokers who wish to ensure that a customer is fully informed about the details of a transaction prior to committing to it.
Investors typically conduct due diligence when evaluating potential investments. This may include mergers, corporate acquisitions or divestitures. Due diligence can uncover hidden liabilities, such as legal disputes or outstanding debts that could be revealed only after the fact, and could affect the decision to conclude the deal.
There are various types of due diligence, such as tax, financial, and commercial due diligence. Commercial due diligence is focused on a company’s supply chain as well as its market analysis and its growth prospects. Financial due diligence review examines the financials of a business to ensure that there are no accounting irregularities, and the company is on sound financial footing. Tax due diligence analyzes the tax liabilities of a business and determines if there are any outstanding tax.
Due diligence is typically limited to a specific time period that is also known as due diligence time, in which a buyer can evaluate a purchase and ask any questions. Depending on the type of deal the buyer may require professional assistance in conducting the research. For instance an environmental due diligence could focus on the list of environmental permits and licenses that the company is able to obtain, while financial due diligence may include a review performed by certified public accountants.