Due diligence is the process by which you thoroughly review information prior to making major purchases or commitments. It helps you weigh the benefits against the risks and makes a decision that’s financially viable and strategically sound.
While the details of due diligence can differ depending on transaction type, there are some essential steps for each transaction:
Commercial Due Diligence
This includes a look at business operations, such as customer relations and sales strategies or growth prospects. The goal is to understand the market position of the target company and financial strength, allowing for accurate valuation and ensuring that the deal will be beneficial to all parties.
Tax Due Diligence
This section examines the tax profile of the targeted business, focusing on taxes that are not income-based, such as usage and sales payroll, property and transfer taxes. It also analyzes the tax implications on the purchase, including how to structure the purchase and how to minimize potential liabilities.
Representations & Warranties
Prior to a company’s IPO is made public, attorneys and underwriters, as well as the company themselves carry out due diligence in order to verify the accuracy of the information that it has submitted to the SEC. In this regard, the target company is interviewed by key employees and the read more C-suite to discuss everything from the development of new products, intellectual property to revenue projections, with an eye toward finding possible problems that could hinder the deal. This is not the same as doing due diligence on customers, however it’s an important step to ensure that all information and documents are correct and current prior to the DDQ is issued.
