What Is Due Diligence?

If you're buying a new house or a business, due diligence is the process of carefully reviewing the facts prior to making a big purchase or commitment. It helps you weigh the advantages against the dangers and make a choice that's financially viable and strategically sound.

While the details of due diligence differ based on transaction type, there are a few critical steps for each:

Commercial Due Diligence

This includes a thorough review of business operations, such as customer relations and sales strategies, as well as growth potential. The goal is to know the market position of the target company and financial strength, allowing for a precise valuation and ensuring that the deal will be beneficial to all parties.

Tax Due Diligence

This examines the target company's tax profile which focuses on income as well as taxes that are not income-based, such as use and sales, employment/payroll property, transfer taxes(opens in a new tab). It also looks at the impact of any tax issues on the acquisition, as well as how to structure it and how to minimize the risk of liability.

Representations & Warranties

Before an company's IPO attorneys, underwriters as well as the company itself perform due diligence to verify that the information contained in filings with the SEC are accurate. As part of this procedure, the company that is being targeted is interviewed by its key employees and its top management to discuss everything from the development of new products, intellectual property to revenue projections, with the goal of identifying any potential mistakes that could undermine the deal. This isn't the exact same as conducting due-diligence on clients, but it is a crucial part of ensuring that all documents and data are current and complete prior to the DDQ.

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