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Due diligence refers to the investigation and analysis that a company or individual conducts before entering into any transaction, like investing in the business. This investigation is generally required by law for businesses seeking to purchase other businesses or assets as well as for brokers who wish to ensure that a client is fully informed of the specifics of a transaction before agreeing to it.

Investors typically conduct due diligence when evaluating potential investments. This can include mergers, corporate acquisitions or divestitures. Due diligence can uncover hidden liabilities such as outstanding debts and legal disputes that are only revealed after the fact. This could affect a decision on whether to conclude a deal.

There are various types of due diligence. They include commercial, financial and tax due diligence. Commercial due diligence concentrates on a company’s supply chain, its market analysis, and its growth prospects. Financial due diligence review analyzes the financial records of a company in order to ensure that there are no accounting irregularities, and that the company is on solid financial ground. Tax due diligence analyzes the company’s tax exposure and determines if there are any outstanding tax.

Often due diligence is restricted to a time frame that is negotiated, known as the due diligence period where buyers can examine the potential purchase and ask questions. Based on the type of deal, a buyer might require specialist involvement to perform this research. Due diligence on environmental matters might include the list of environmental permits and licenses that are held by a company, while due diligence on financial matters may require an audit conducted by certified public accounting firms.