No matter if you’re buying a brand-new property or starting a business, due diligence is the process of thoroughly reviewing the information prior to making a big purchase or commitment. It allows you to weigh the benefits against the risks and make a decision that is financially sound and strategically sound.
Due diligence is different depending on the nature of the transaction, however there are some critical steps in each case:
Commercial Due Diligence
This includes a thorough review of business operations, for example customer relations and sales strategies or growth prospects. The goal is to comprehend the market position of the target company and financial strength, allowing for a precise valuation and ensuring that the transaction will benefit all parties.
Tax Due Diligence
The analysis examines the tax profile of the target company with a focus on income and taxes that are not income-based, such as sales and use, employment/payroll property, transfer taxes(opens in a new tab). It also examines the impact of tax issues on the acquisition, and how to structure it and how to mitigate the potential liability.
Representations and Warranties
Prior to a company’s IPO is made public, attorneys as well as underwriters and the company themselves perform due diligence to verify the accuracy of the information it has filed with the SEC. As part of this, the target company is interviewed by its key employees and C-suite executives to discuss everything from the development of new products, intellectual property to revenue projections, all with an eye toward finding possible mistakes that could undermine the deal. This isn’t the exact same as conducting due diligence on clients, but it is a vital step in ensuring that all documents and information are up-to-date and complete before the DDQ.