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Due diligence is the method 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 the risks and make an informed and financially sound decision.

Due diligence varies depending on the type of transaction, but there are some critical steps in every case:

Commercial Due Diligence

This includes a review of business operations, like customer relations, sales strategies, or growth potential. The goal is to know the market position of the target firm and financial strength, allowing for an accurate valuation and guaranteeing that the deal is beneficial to all parties.

Tax Due Diligence

This section examines the tax profile of the target business, focusing on taxes that are not income-based, such as usage and sales as well as payroll, property and transfer taxes. It also analyzes the impact of tax issues on the purchase, such as how to structure the purchase and how to minimize potential liability.

Representations and Warranties

Before an IPO is made public, attorneys, underwriters and the company themselves conduct due diligence to verify the accuracy of the information it has filed with the SEC. As part of this process, the company being targeted is interviewed by its key employees and its C-suite to discuss everything from the development of new products, intellectual property to revenue projections, all with an eye towards identifying possible mistakes that could undermine the deal. This is not the same thing as performing due diligence on clients, but it’s essential to make sure that all information and documents are up-to-date and complete prior to the DDQ is issued.