Types of Due Diligence

Due diligence is the process of investigation and analysis a business or individual conducts prior to entering into any transaction, like investing in a business. Due diligence is required by law for companies looking to purchase other assets or businesses. It is also required by brokers to ensure that their customers are fully aware prior to approving an agreement.

Investors typically conduct due diligence in order to assess possible investments. This may include mergers, corporate acquisitions or divestitures. The process could reveal hidden liabilities such as outstanding debts and legal disputes which will be revealed after the fact. This could affect the decision on whether to conclude a deal.

Due diligence can be divided into three categories: financial, commercial fiscal, and tax due diligence. Commercial due diligence focuses on the supply chain of a business and market analysis, as well its growth prospects and a financial diligence investigation examines a company's financial books to make sure there aren't any accounting irregularities and is financially sound. Tax due diligence analyzes a company's exposure to taxes and uncovers any tax owed.

Due diligence is often limited to a specific time period, also known as due diligence where a buyer might evaluate a possible purchase and ask any questions. Depending on the nature of deal, a buyer may require the assistance of an expert to conduct this study. Due diligence on environmental matters virtual boardroom might include an inventory of environmental permits and licenses issued by a company, while a due diligence on financial issues might require an audit by certified public accounting firms.