Due diligence refers to the individual or company’s research and analysis of data prior to committing to a transaction, such as investing in a business or buying a piece of property. Due diligence is required by law by companies that want to purchase other businesses or assets. It is also required by brokers to ensure their customers are fully informed prior to committing to a transaction.
Investors will usually perform due diligence to evaluate possible investments. This may include mergers, corporate acquisitions or divestitures. Due diligence can uncover undiscovered liabilities, like legal disputes and outstanding debts that are only made public after the fact. This could affect the decision of whether to conclude a deal.
There are a variety of due diligence, including commercial, financial and tax 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 investigation analyzes the financial records of a company in order to ensure that there are no accounting irregularities, and that the company is on solid financial ground. Tax due diligence examines the tax exposure of a company and identifies any outstanding tax.
Often, due diligence is limited to a negotiated timeframe, known as the due diligence period during which buyers can assess the purchase and ask questions. Depending on the type of deal, a buyer might require specialist involvement to perform this investigation. For instance an environmental due diligence might focus on a list of all environmental permits and licenses a company holds, while the financial due diligence might require a review by certified public accountants.
VDRs bridging the gap between traditional and digital due diligence