08 Nov Types of Due Diligence

Due diligence refers to a company’s or an individual’s examination and analysis of data prior to making a purchase such as investing in a company or buying a piece of property. This investigation is generally required by law for companies seeking to purchase other businesses or assets as well as for brokers who want to ensure that their client is fully aware of the specifics of a deal before committing to it.

Investors typically conduct due diligence when considering investments which could include a corporate acquisition either through merger or divestiture. Due diligence can reveal hidden liabilities, for instance legal disputes or outstanding debts, which would be revealed only after the fact, and could affect the decision to close an acquisition.

Due diligence can be divided into three types: commercial, tax, and financial due diligence. Commercial due diligence is focused on the supply chain of a business and market analysis, as well its growth prospects, while a financial due diligence analysis examines the company’s financial books to make sure there aren’t any accounting errors and is on solid financial footing. Tax due diligence analyses the tax exposure of a firm and also identifies any tax owed.

Due diligence is often limited to a specific time period that is also known as due diligence time during which buyers may evaluate a potential purchase and ask any questions. Depending on the nature of deal, buyers may require the assistance of an expert to conduct the due diligence. For example, environmental due diligence may concentrate on the list of environmental permits and licenses the company has, whereas financial due diligence could include a review performed by certified public accountants.

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