Definition: Due diligence is the process of examining all the material facts of a contract or a deal before a legal contract is signed by both the parties. Put differently, it could also mean verifying the accuracy of a statement.
Description: The term, due diligence can be used in a lot of contexts, but it is generally used in reference to business transactions (mostly mergers and acquisitions, joint venture, project finance, securitization, etc.).
The scope of due diligence typically depends on the nature of transaction proposed to be undertaken. It is not limited to buyers, but even sellers can perform a due diligence on the buyer.
It consists of background, legal, accounting and factual checks. The basic reason for doing such an exercise is to make sure that there are no surprises after the deal is signed.
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.
Either parties do due diligence after both the seller and the buyer have agreed in principle to a deal, but before they have signed a binding agreement.
Due diligence also helps in understanding the seller's reasons for selling their business. The information that gets collected in the process is highly sensitive and confidential.
As part of the due diligence process, the party who is investing the money should also review the business' fixed and intangible assets. Knowing exactly what's for sale will help the buyer in valuing the business accurately.
