Due diligence refers to a company’s or an individual’s research and analysis of data prior to committing to a transaction for example, investing in a company or buying a piece of property. Due diligence is usually required by law if a company wants to buy other businesses or assets and by brokers who want to ensure that their client is fully informed of the specifics of a deal prior to signing a contract.

Investors typically conduct due diligence when looking at potential investments, which may include an acquisition, merger essential due diligence for commercial real estate or divestiture. The process can uncover undiscovered liabilities, such as legal disputes or outstanding debts that would be revealed only after the fact, which could affect the decision to conclude a deal.

There are many types of due diligence. These include tax, financial and commercial due diligence. Commercial due diligence is focused on the supply chain of a business and market analysis, as well as growth prospects and a financial due diligence investigation examines a company’s financial records to be sure there aren’t any accounting irregularities and is in good financial standing. Tax due diligence focuses on a company’s exposure to taxes and identifies any outstanding tax.

Due diligence can be restricted to a period of time also known as a due diligence period where a buyer may evaluate a potential purchase and ask questions. Depending on the type of deal, a buyer might need professional assistance in conducting this study. Due diligence on environmental concerns could include a list of permits for environmental protection and licenses that are held by a company, whereas due diligence on financial matters might require an audit by certified public accounting firms.