When you're looking to purchase a brand new home or business, due diligence is the process of thoroughly reviewing the information prior to making a big purchase or commitment. It helps you weigh the benefits against risks and help you make an economically viable and strategic decision.
Due diligence differs based on the kind of transaction, but there are some essential steps in every case:
Commercial Due Diligence
This includes a review of the business operations, including customer relations and sales strategies, as well as growth potential. It is essential to know the target company's financial strength and market position in order to accurately evaluate the deal and ensure it will benefit all parties.
Tax Due Diligence
This looks at the target company's tax profile that focuses on income and other taxes like employment/payroll, sales and use property, transfer taxes(opens in new tab). It also considers the impact of tax issues relating to the acquisition, such as how to structure it and how to minimize any potential liabilities.
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 true. In this regard process, the company being targeted is interviewed by its key employees and the C-suite to discuss everything from the development of new products, intellectual property to revenue projections, all with an eye toward finding possible mistakes that could undermine the deal. This isn't the exact equivalent of conducting due diligence on potential customers, but is an important step in making sure that all documents and data are current and complete before the DDQ.
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