Types of Due Diligence

VDRs: a strategic tool in modern corporate deal-making

Due diligence is the process of investigation and analysis a business or person conducts prior to entering into any transaction, such as investing in an enterprise. Due diligence is required by law by companies who want to buy other assets or businesses. It is also required by brokers to make sure their customers are fully aware prior to approving the transaction.

Investors usually conduct due diligence when evaluating potential investments, which could include a corporate acquisition such as a merger, divestiture or merger. The process can uncover hidden liabilities, like legal disputes or outstanding debts that would be revealed only after the fact, which could influence the decision to make a deal.

There are a variety of due diligence, including commercial, financial and tax due diligence. Commercial due diligence is focused on a company’s supply chain, its market analysis, and its growth prospects. Financial due diligence analysis examines a company’s financial records in order to ensure that there aren’t any accounting irregularities, and the company is on sound financial footing. Tax due diligence analyzes the tax exposure of a company and uncovers any tax owed.

Due diligence can be restricted to a specific time period called due diligence during which buyers can evaluate a purchase and ask questions. Depending on the type of deal, a buyer could require specialist involvement to perform this investigation. For instance environmental due diligence may be focused on an inventory of all environmental permits and licenses that a company holds, while the financial due diligence might include a review conducted by certified public accountants.