If you’re buying a new house or a business, due diligence is the process of carefully reviewing information before making a major purchase or commitment. It allows you to evaluate the benefits and risks and come to a decision that’s financially feasible and strategically sound.
While the specifics of due diligence can differ depending on type of transaction, there are several essential steps to follow for each:
Commercial Due Diligence
This involves a review of business operations, for example customer relations and sales strategies, as well as growth prospects. It is crucial to know the target company’s financial strength and market position in order to accurately value the deal and ensure that it will benefit everyone involved.
Tax Due Diligence
This section examines the tax profile of the targeted company, with a focus on non-income taxes, like usage and sales as well as payroll, property and transfer taxes. It also analyzes the impact of any tax-related issues that may arise during the acquisition, as well as how to structure it and how to limit potential liabilities.
Representations and Warranties
Before a company’s IPO is announced, attorneys and underwriters, as well as the company themselves carry out due diligence in order to confirm the accuracy of the information that it has submitted to the SEC. To identify possible pitfalls, the top employees of the company and its C-suite interview the company to discuss everything from intellectual property to revenue forecasts. This is not the same as doing due diligence on clients, but it’s essential to make sure that all information and documents are complete and up-to-date before the DDQ is issued.
