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What Is Due Diligence?

Whether you’re purchasing a new house or a business due diligence is the practice of carefully reviewing information before making a big purchase or commitment. It helps you weigh benefits against risks and help you make a financially viable and strategic decision.

Due diligence is different based on the kind of transaction, but there are a few essential steps for each transaction:

Commercial Due Diligence

This includes a thorough review of the business operations, including customer relations and sales strategies or growth potential. It is crucial to understand the financial strength of the target business and market position to accurately evaluate the deal and ensure it will benefit everyone involved.

Tax Due Diligence

This section examines the tax profile of the acquiring company, focusing on non-income taxes, such as sales and usage payroll, property, and transfer taxes. It also examines the impact of tax issues that might arise from the acquisition, such as how to structure it and how to minimize the potential liability.

Representations and Warranties

Prior to an IPO, attorneys, underwriters and the company itself undertake due diligence to ensure that the statements in its filings with the SEC are accurate. In this regard process, the company being targeted is interviewed by its key employees and its top management to discuss everything from product development to intellectual property to revenue projections, with an eye toward finding possible pitfalls that could derail the deal. This isn’t the same as conducting due diligence on customers, but it is an important step to ensure that all documents and information are complete and up-to-date before the DDQ is issued.

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