Due diligence refers to the process of a person or a business’s study and analysis of information before entering into a transaction for example, investing in a business or purchasing a piece property. This investigation is generally required by law for businesses seeking to purchase other businesses or assets, as well as by brokers who wish to ensure that the client is fully informed of the details of a transaction before committing to it.

Investors typically perform due diligence when evaluating possible investments. This could be in the form of mergers, acquisitions, or divestitures. Due diligence can reveal undiscovered liabilities, such as legal disputes or outstanding debts that will be revealed only after the fact, and could affect the decision to close an acquisition.

Due diligence can be classified into three categories: financial, commercial tax and financial due diligence. Commercial due diligence focuses on the supply chain of a company and market analysis, as well as growth prospects and a financial due diligence investigation examines a company’s financial records to make sure there are no accounting irregularities, and to ensure that the company is on solid financial footing. Tax due diligence analyzes the company’s tax exposure and also identifies any outstanding tax.

Often due diligence is restricted to a specified timeframe, called the due diligence period, where buyers can examine the potential purchase and ask questions. Based on the type of deal one might require expert assistance to conduct this study. For instance an environmental due diligence might consist of an inventory of all environmental permits and licenses a company holds, while financial the unmatched reliability of VDRs in high-stakes deals due diligence could involve a review by certified public accountants.