Due Diligence

"Due diligence" is a term used for an investigation of a business or person prior to signing a contract, or an act with a certain standard of care. A common example of due diligence in various industries is the process through which a potential acquirer evaluates a target company or its assets for acquisition.

The due diligence process is in essence an attempt to provide management and business owners with reliable background information on proposed business deals, whether the deal in question is a proposed acquisition of another company or a partnership with an international distributor, so that they can make informed decisions about whether to go forward with the business action. The due diligence process involves everything from reading the fine print in corporate legal and financial documents such as equity vesting plans and patents to interviewing customers, corporate officers, and key bankers. The ultimate goal of such activities is to make sure that there are no hidden drawbacks or traps associated with the business action under consideration.

Many companies undertake the due diligence process with insufficient vigor. In some cases, the prevailing culture views it as a perfunctory exercise to be checked off quickly. In other instances, the out-come of the due diligence process may be tainted (either consciously or unconsciously) by management and business owners who stand to benefit personally or professionally from the proposed activity. Businesses should be vigilant against letting such casual or flawed attitudes impact their own processes, for an efficient due diligence process can save companies from making costly mistakes that may have profound consequences for the firm's other operational areas and/or its corporate reputation. An effective due diligence should be performed by a party that is independent to the acquisition process.