Whether you’re purchasing a new home or a company due diligence is the practice of thoroughly reviewing the information prior to making a big purchase or commitment. It helps you weigh the benefits against risks and make a financially viable and strategic decision.
Due diligence is different based on the nature of the transaction, but there are some essential steps in every case:
Commercial Due Diligence
This involves a review of business operations, like customer relations and sales strategies or growth prospects. The goal is to comprehend the market position of the target company and financial strength, which allows for an accurate valuation and guaranteeing that the deal will be beneficial to all parties.
Tax Due Diligence
This section examines the tax profile of the target company, focusing on taxes that are not income-based, such as sales and usage as well as payroll, property and transfer taxes. It also examines the impact of tax-related issues that may arise during the acquisition, including how to structure it and how to limit potential liabilities.
Representations and Warranties
Before an company’s IPO is disclosed, lawyers and underwriters as well as the company themselves perform due diligence in order to verify the accuracy of the documents it has filed with the SEC. In this regard, the target company is interviewed by key employees and its top management to discuss everything from creation of products, intellectual property to revenue projections, with an eye towards identifying possible issues that could impede the deal. This isn’t the same as doing due diligence on customers, but it is an important step to ensure that all information and documents are correct and current prior to the DDQ is issued.