Due diligence is the process of investigation and analysis that a company or individual conducts prior to entering into any type of transaction, such as investing in a business. Due diligence is required by law by companies looking to purchase other assets or businesses. It is also required by brokers to make sure their clients are informed prior to committing to a transaction.
Investors typically conduct due diligence in order to assess possible investments. This could include mergers, acquisitions, or divestitures. The process could reveal hidden liabilities like outstanding debts and legal disputes that can only be disclosed after the fact. This could influence the decision to conclude a deal.
There are various types of due diligence. They include the tax, financial, and commercial due diligence. Commercial due diligence concentrates on a company’s supply chain and its market analysis and its growth prospects. Financial due diligence analysis examines a company’s financial books to make sure that there aren't any accounting irregularities and that the company is on sound financial footing. Tax due diligence analyzes the tax liabilities of a business and also identifies any outstanding tax.
Due diligence is often limited to a specific time period that is also known as due diligence, in which a buyer can evaluate a purchase and ask any questions. Depending on the nature of deal, a buyer might require the assistance of an expert to conduct this research. A due diligence on environmental concerns could include an inventory of environmental permits and licenses held by a company, whereas due diligence on financial matters might involve an audit by certified public accounting firms.