Due diligence is the process by which you take the time to review all information prior to making any major commitments or purchases. It allows you to weigh the advantages against risks, and makes an economically viable and strategic decision.
While the details of due diligence vary by type of transaction, there are several essential steps to follow for each type of transaction:
Commercial Due Diligence
This involves a review of the business operations, including customer relations and sales strategies, as well as growth prospects. It is important to know the target company’s financial strength and market position in order to accurately value the deal and ensure that it will benefit everyone involved.
Tax Due Diligence
This section examines the tax profile of the targeted company, with a particular focus on taxes that are not income-based, such as sales and usage payroll, property, and transfer taxes. It also looks at the tax implications on the purchase, as well as how it should be structured and how to reduce potential liability.
Representations and Warranties
Before an IPO is announced, attorneys and underwriters, as well as the company themselves perform due diligence to verify the accuracy of the information it filed with the SEC. As part of this, the target company is questioned by key employees and the C-suite to discuss everything from product development to intellectual property to revenue projections, with an eye toward finding possible issues that could impede the deal. This isn’t exactly the same as conducting due-diligence on prospective customers, but it is a crucial part of ensuring that all documents and information are up-to-date and complete prior to the DDQ.
