What is due diligence?

Definition: Due diligence is an audit, investigation, or comprehensive analysis of a potential investment, company, or product, with the goal of determining its potential value and risks.

The process involves reviewing all financial statements, liabilities, contracts, management and operations, and market conditions, so individuals and companies can make informed decisions.

It is performed as part of risk management before important transactions, such as acquisitions, mergers, or public offerings, to assess the risks and ROI of the investment.

For example, a company looking to acquire another company will perform due diligence to assess the target company's financial health, legal compliance, competitive position, and future growth prospects.

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Article FAQs

Who performs due diligence?

Due diligence is performed by investors, fund managers, company that is acquiring other company, professional due diligence firms, or financial institutions.

How long does the due diligence process take?

The length of the due diligence process depends on the size and complexity of the investment/business and the scope of the investigation. It can take anywhere from a few weeks to several months.

What are the key components of due diligence?

The key components of due diligence are financial analysis, market analysis, operational analysis, legal analysis, and management analysis.

What happens after due diligence is completed?

After due diligence is completed, the results are used to make a decision about the investment opportunity. If the results are positive, the investment process can proceed. If the results are negative, the investment may not be pursued or may be renegotiated.

What types of due diligence are there?

There are four major types of due diligence process: financial due diligence, legal due diligence, operational due diligence, and tax due diligence.