Due Diligence
The investigation and verification of facts conducted before entering a significant business transaction, designed to identify risks, confirm representations, and inform decision-making.
What Is Due Diligence?
Due diligence is the systematic investigation a prudent party performs before signing a major contract, acquiring a business, investing in a company, or extending credit. It involves reviewing financial, legal, operational, tax, regulatory, and commercial information to verify the counterparty's representations and uncover risks that might affect the transaction.
Typical Due Diligence Categories
- **Financial**: audited statements, tax returns, accounts receivable aging, debt schedules - **Legal**: corporate organization documents, material contracts, litigation, compliance records - **Intellectual property**: patent and trademark portfolios, license agreements, ownership chains - **Employment**: payroll records, benefit plans, employment agreements, pending claims - **Real estate**: title reports, environmental assessments, lease abstracts, zoning compliance - **Operational**: customer concentration, supplier dependencies, IT infrastructure, cybersecurity
Practical Importance
Findings from due diligence often translate into deal-specific representations, warranties, and indemnities in the definitive agreement, reduced purchase price, conditions to closing, escrow holdbacks, or termination of the transaction. In mergers and acquisitions, due diligence is typically conducted under a non-disclosure agreement and supported by a virtual data room. Securities laws may require additional diligence for public offerings under Section 11 of the Securities Act of 1933 to support a due diligence defense.