Any merger and acquisition transaction has to be carefully planned and executed  therefore, before closing a deal and to make more informed decisions, the buyer normally carries out certain agreed upon procedures to assess the deal from commercial, financial, tax and legal standpoints. Beside important issues, this includes a spectrum of tax and regulatory issues such us exchange control, income taxes, indirect taxes and capital market regulations.

Companies also do due diligence when a business is looking to add a vendor, purchase commercial property or hire a new employee. The information that is collected after the process is reviewed to make a final decision.

Types of due diligence

Based on the first perspective  there are two types of due diligence.

Buyer due diligence

Vendor due diligence

Buyer due diligence : When one refers to ‘due diligence’, it normally means a buyer due diligence. It is the acquirer or the buyer who is interested in getting a better insight into the exposures or upsides of the target. Hence it is in the acquirer’s/ buyer’s interest that he carries out the due diligence before closing the deals. Normally all buyers carry out a due diligence before making their acquisition. The buyer generally appoints consultants to carry out the due diligence and provide expert advice on the implication of the findings of the due diligence.

Vendor due diligence : In recent years, vendor due diligence is gaining popularity. This is when the target’s management carries out a due diligence on the target. The target’s management, on its own accord, appoints consultants to carry out the due diligence on the target. The consultant would provide management with its vendor due diligence report highlighting the exposure or upside in the targets. Vendor due diligence is useful in cases where the target’s management proposes to invite more than one investor /acquirer. The target’s management would provide this vendor due diligence report to prospective investors/acquirer.