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What is due diligence?

Due diligence tutorial

Due diligence is the process of investigating a person or company before signing a contract or financial agreement. It is most commonly used during a merger, acquisition or company takeover.

Where have you heard about due diligence?

You may have heard about businesses ‘doing their due diligence’ when a big merger or acquisition is reported in the news. This is an important part of the process as it can be make or break for the takeover.

As well as being a business term, due diligence has become a phrase that is more generally associated with 'doing your research'.

What you need to know about due diligence.

Due diligence was first used in the 1933 US Securities Act, which charged securities dealers and brokers with the responsibility of disclosing relevant material about the securities they were selling in order to protect buyers.

The process of due diligence basically involves studying a company or individual’s financial and business documents to make sure there are no discrepancies between what is claimed and what is actually true of the business in question. This includes:

  • talking to employees and management board
  • visiting business location
  • checking customer lists
  • examining condition of equipment/facilities
  • looking at all company liability documents
  • checking for recent or historical lawsuits

An accountant and lawyer are usually involved to validate all the data.

If a company buys another company without performing due diligence, they leave themselves vulnerable to hidden liabilities and finances.

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