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Due diligence is the process of investigation and analysis that a company or individual conducts before entering into any transaction, such as investing in an enterprise. Due diligence is required by law by companies looking to purchase other assets or businesses. It is also required by brokers to ensure their customers are fully aware prior to approving a transaction.
Due diligence is the process that investors usually follow when looking at potential investments, which may include an acquisition or merger, or even a divestiture. Due diligence can reveal hidden liabilities, for instance legal disputes or outstanding debts, which would be disclosed only after the fact, which could affect the decision to conclude an agreement.
Due diligence can be divided into three types: financial, tax, and financial due diligence. Commercial due diligence is focused on a company’s supply chain and market analysis as well as its growth prospects and a financial due diligence analysis examines the company’s financial books to make sure there are no accounting errors and is on solid financial footing. Tax due diligence focuses on the tax liabilities of a business and identifies any outstanding tax.
Due diligence is often limited to a set period of time, also known as a due diligence period during which buyers may evaluate a potential purchase and ask any questions. Based on the type of deal, a buyer may require the assistance of an expert to conduct the due diligence. Due diligence on environmental matters might include a list of environmental permits and licenses issued by a business, while a due diligence on financial issues may require an audit conducted by certified public accounting firms.
