What Is Due Diligence?

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Due diligence is the process by which a business is thoroughly evaluated prior to a transaction. It involves conducting research, gathering and evaluating extensive quantitative and qualitative information to minimize risks and ensure compliance with legal requirements and assist in making informed decisions. Due diligence is typically carried out by companies that are considering a partnership, acquisition or merger.

A thorough investigation can uncover potential risks and opportunity, but implementing the findings isn’t always easy. It can be difficult to know what questions to ask and which documents to review. Additionally, it could take a considerable amount of time to collect and examine data.

Due diligence can be accelerated by having clear expectations and goals before the M&A process starts. Similarly, an VDR that includes project management capabilities lets teams break down the process into sections that are logical. They can then check off items as each section is completed.

It’s important to remember that, no matter how thorough a due diligence process may be, it can never uncover every possible issue. Therefore, a business must always implement a continuous monitoring and mitigation strategy to monitor third parties vendors, employees, and even businesses that have been acquired.

The concept of ‘due diligence’ was legally created four years following the 1929 stock market crash following the passage of the Securities Act of 1933, which brought transparency to financial markets by requiring brokers to release relevant and accurate information about their securities. The term has since been incorporated into the business world, where it’s used to describe prudent and careful action that reasonable people are required to take to mitigate risk and avoid negative outcomes.