When you’re looking to purchase a brand new home or business due diligence is the practice of thoroughly reviewing the information prior to making a major purchase or commitment. It helps you weigh benefits against risks and make an economically viable and strategic decision.
Due diligence is different based on the nature of the transaction, however there are a few essential steps for each transaction:
Commercial Due Diligence
This involves a review of the business operations, including customer relations, sales strategies, or growth prospects. The goal is to understand the target company’s market position and financial strength, which allows 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 company, with a particular focus on non-income taxes, such as usage and sales, payroll, property and transfer taxes. It also looks at the impact of tax issues relating to the acquisition, including how to structure it and how to mitigate any potential liabilities.
Representations and Warranties
Before a company’s IPO attorneys, underwriters and the company themselves perform due diligence to verify that the statements in its filings with the SEC are accurate. In this regard, the target company is interviewed by its key employees and its top management to discuss everything from creation of products, intellectual property to revenue projections, all with the goal of identifying any potential pitfalls that could derail the deal. This isn’t the same as doing due diligence on customers, but it’s essential to make sure that all documents and information are current and accurate prior to when the DDQ is issued.
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