What Is Due Diligence?

No matter if you’re buying a brand-new property or starting a business, due diligence is the process of carefully examining information prior to making a major purchase or commitment. It helps you weigh the benefits against risks and help you make an economically viable and strategic decision.

Due diligence varies depending on the nature of the transaction, however there are some critical steps for each transaction:

Commercial Due Diligence

This includes a review of business operations, for example customer relations and sales strategies or growth potential. It is crucial to understand the target company’s financial strength and market position to accurately value the deal and ensure it will benefit all parties.

Tax Due Diligence

The analysis examines the tax profile of the company in question, focusing on income and taxes that are not income-based, such as sales and use, employment/payroll property, transfer taxes(opens in new tab). It also looks at the impact of tax issues that might arise from the acquisition, including how to structure it, and how to reduce any potential liabilities.

Representations & Warranties

Before an company’s IPO is announced, attorneys, underwriters and the company themselves perform due diligence to verify the accuracy of the documents it has filed with the SEC. As part of this 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, all with an eye towards identifying possible issues that could impede the deal. This isn’t exactly the same as conducting due-diligence on prospective customers, but it is a crucial step in ensuring that all documents and information are up-to-date and complete before the DDQ.

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