No matter if you’re buying a brand-new property or starting a business, due diligence is the practice of carefully reviewing the facts prior to making a big purchase or commitment. It allows you to weigh the benefits against risks and make an economically sound and strategic decision.

While the details of due diligence are different based on the type of transaction, there are some essential steps for each:

Commercial Due Diligence

This involves a review of the business operations, including customer relations and sales strategies or growth potential. It is essential to know the financial strength of the target company and market position in order to accurately evaluate the deal and ensure that it will benefit all parties.

Tax Due Diligence

This section examines the tax profile of the targeted business, focusing on non-income taxes such as usage and sales, payroll, property and transfer taxes. It also considers the impact of any tax issues on the acquisition, and how to structure it and how to limit the risk of liability.

Representations & Warranties

Prior to a company’s IPO is disclosed, lawyers and underwriters as well as the company themselves do their due diligence to confirm the accuracy of the documents it has submitted to the SEC. To identify potential pitfalls, key employees of the company and its C-suite members interview the company to discuss everything from intellectual property to revenue forecasts. This is not the same as conducting due diligence on customers, but it is essential to make sure that all information and documents are complete and up-to-date before the DDQ is issued.