In lay mans language, Due diligence is the effort made by an ordinarily, prudent or reasonable party to avoid harm to another party or himself. The term “Due diligence” is used for a number of concepts involving either the performance of an investigation of a business or person, or the performance of an act with a certain standard of care.
In finance, due diligence is the process of research and analysis that takes place in advance of an acquisition, investment, business partnership or bank loan in order to determine the value of the subject of the due diligence or whether there are any “skeletons in the closet”.
Due diligence can also refer to the ongoing activities of pension or investment fund managers who keep track of the operations and financial health of the corporations they invest in and the trustworthiness and ability of their managers , or those of the managers of an acquiring corporation toward a target corporation.
Thus, Due diligence involves investigation and evaluation of a management team’s characteristics, investment philosophy, and terms and conditions prior to committing capital. Due diligence is undertaken in order to determine the value of the subject of the due diligence and unearth any issues or potential issues. It is expected to provide a realistic picture of how the business is performing now, and how it is likely to perform in the future.
The potential investor generally uses in-house resources or out sources the job to consultants who specialize in due diligence and corporate investigations to investigate the background and principals of the target company. The potential investor may also seek legal counsel and professional accountants to get expert advice in all areas.
In addition to identifying risks and implications of an investment, due diligence may include data on a company’s solvency and assets.
Due Diligence is the process of evaluating a prospective business decision by getting information about the financial, legal, and other material (important) state of the other party.
Due diligence is used most often when buying a business, as the buyer spends time going through the financial situation of the business, legal obligations, customer records, and other documents. The prospective buyer wants to validate his/her opinion of the business to see if it is truly a good decision.
If you don't do your "due diligence" in a business situation, you may end up buying something that isn't as you thought it was, or you may end up in a business relationship that will cause you trouble. It may be costly to perform due diligence, because it usually involves the services of a CPA and an attorney, but it's certainly worth your trouble.
regards,
ratan
Due diligence refers to the process of conducting research and making an application based on that research. It is essential for both the buyer and seller of a business to be knowledgeable of the business in question and whether it is a good investment.
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