What Is Due Diligence?

Whether you’re purchasing a new home or a company due diligence is the process of carefully reviewing information before making a major purchase or commitment. It helps you weigh benefits against risks and help you make an economically viable and strategic decision.

Due diligence is different depending on the nature of the transaction, but there are certain steps that must be taken in every case:

Commercial Due Diligence

This includes a review of business operations, like customer relations and sales strategies or growth prospects. It is essential to know the financial strength of the target company and market position to accurately value the deal and ensure that it will benefit all parties.

Tax Due Diligence

This looks at the target company’s tax profile, focusing on income and non-income taxes, such as payroll and employment property, transfer taxes(opens in new tab). It also looks at the impact of tax issues that might arise from the acquisition, as well as how to structure it, and how to reduce potential liabilities.

Representations and Warranties

Before an company’s IPO, attorneys, underwriters as well as the company itself perform due diligence to verify that the statements in its filings with the SEC are accurate. In this regard procedure, the company that is being targeted is interviewed by its key employees and the C-suite to discuss everything from the development of new products, intellectual property to revenue projections, all with an eye towards identifying possible issues that could impede the deal. This isn’t exactly the equivalent of conducting due diligence on customers, but is a vital step in making sure that all documents and data are current and complete prior to the DDQ.


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