What is a Due Diligence
An investigation or audit of a potential investment. Due diligence serves to confirm all material facts in regards to a sale.
Generally, due diligence refers to the care a reasonable person should take before entering into an agreement or a transaction with another party.
Offers to purchase an asset are usually dependent on the results of due diligence analysis. This includes reviewing all financial records plus anything else deemed material to the sale. Sellers could also perform a due diligence analysis on the buyer. Items that may be considered are the buyer's ability to purchase, as well as other items that would affect the purchased entity or the seller after the sale has been completed.
Due diligence is a way of preventing unnecessary harm to either party involved in a transaction.
Why is Due Diligence Conducted?
There are many reasons for conducting due diligence, including the following:
- Confirmation that the business is what it appears to be;
- Identify potential "deal killer" defects in the target and avoid a bad business transaction;
- Gain information that will be useful for valuing assets, defining representations and warranties, and/or negotiating price concessions; and
Verification that the transaction complies with investment or acquisition criteria
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