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Due diligence is the term used to describe the individual or company’s research and analysis of data prior to making a purchase for example, investing in a business or purchasing a piece of property. Due diligence is required by law by businesses that wish to purchase other businesses or assets. It is also required by brokers to make sure their clients are aware prior to approving any transaction.
Due diligence is a requirement for investors when looking at potential investments, which may include an acquisition, merger or divestiture. Due diligence can uncover undiscovered liabilities, like legal disputes and outstanding debts which will be later on. This could affect the decision of whether to close a transaction.
There are several types of due diligence, including commercial, financial and tax due diligence. Commercial due diligence is focused on the supply chain of a firm and market analysis, as well its growth prospects, while a financial due diligence analysis looks at the company’s financial books to make sure there are no accounting irregularities, and to ensure that the company is on solid financial footing. Tax due diligence studies a company’s exposure to taxes and also identifies any outstanding tax.
Often, due diligence is limited to a time frame that is negotiated, known as the due diligence period in which buyers are able to look at the potential purchase and ask questions. Based on the type of deal, a buyer might need specialist help to conduct this research. For example, environmental due diligence may focus on a list of all environmental permits and licenses the company is able to obtain, while the financial due diligence might involve a review by certified public accountants.