What Is Due Diligence?

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Due diligence is the process by which you take the time to review all information prior to making any major commitments or purchases. It helps you weigh benefits against risks, and makes an economically sound and strategic decision.

Due diligence differs based on the nature of the transaction, however there are certain steps that must be taken in each case:

Commercial Due Diligence

This includes a thorough review of the business operations, including customer relations and sales strategies or growth potential. The aim is to determine the market position of the company being targeted and financial strength, which allows for a precise valuation and ensuring that the transaction will be beneficial to all parties.

Tax Due Diligence

This section examines the tax profile of the targeted business, focusing on non-income taxes such as sales and usage payroll, property, and transfer taxes. It also examines the impact of any tax issues on the acquisition, including how to structure it and how to mitigate the potential liability.

Representations & Warranties

Before a company’s IPO is made public, attorneys as well as underwriters and the company themselves carry out due diligence in order to confirm the accuracy of the information that it has filed with the SEC. As part of this procedure, the company that is being targeted is interviewed by key employees and C-suite executives to discuss everything from the development of products to intellectual property to revenue projections, with an eye on identifying potential mistakes that could undermine the deal. This isn’t the exact equivalent of conducting due diligence on potential customers, but is a crucial part of ensuring that all documents and records are up-to date and complete prior to the DDQ.