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Due diligence is the research and analysis that a company or person conducts prior to entering into any transaction, such as investing in the business. This type of investigation is typically required by law for businesses seeking to buy other assets or businesses and by brokers who want to ensure that the client is fully informed about the specifics of a deal before committing to it.
Investors will usually perform due diligence in order to assess possible investments. This could include mergers, corporate acquisitions or divestitures. The process could reveal hidden liabilities such as legal disputes and outstanding debts that can only be revealed after the fact. This could impact the decision of whether to conclude a deal.
Due diligence can be divided into three types: commercial, tax and financial due diligence. Commercial due diligence focuses on a company’s supply chain and market analysis and its growth prospects. Financial due diligence investigation analyzes the financial records of a company to ensure that there aren’t any accounting irregularities and that the company is on sound financial ground. Tax due diligence analyzes the tax exposure of a company and determines if there are any outstanding taxes.
Due diligence is often limited to a specific time period called due diligence where a buyer might evaluate a possible purchase and ask questions. Depending on the type of deal, a buyer could require the assistance of a specialist to conduct this investigation. A due diligence on environmental matters might include an inventory of environmental permits and licenses held by a business, while due diligence on financial matters might require an audit by certified public accounting firms.