Due diligence

Due diligence is the research conducted prior to engaging in a business transaction.  Working through a due diligence checklist allows someone to have a full knowledge of the risks associated with a transaction. With this knowledge, one can structure the transaction to minimize risks. Due diligence is a major part of acquisition transactions. For example, an acquirer could review the following areas as part of its due diligence investigation of an acquiree:

  • The ownership of all outstanding shares
  • Whether there are any stock options or warrants outstanding
  • The terms of all outstanding debt
  • The status of all accounts payable
  • Whether all taxes due have been paid
  • The status of all accounts receivable
  • Whether any receivables have been pledged
  • The sources of all revenues
  • Whether all expenses have been disclosed
  • The types of employee compensation being paid
  • Whether the auditors have found any recurring control problems
  • Whether the firm has experienced fraud in the past
  • Whether the firm has any transactions with related parties
  • The status of the firm’s intellectual property