Legal and Financial Due Diligence
Due diligence is an investigation, audit, or review performed to confirm facts or details of a matter under consideration. In the financial world, due diligence requires an examination of financial records before entering into a proposed transaction with another party.
- Due diligence is a systematic way to analyze and mitigate risk from a business or investment decision.
- An individual investor can conduct due diligence on any stock using readily available public information.
- The same due diligence strategy will work on many other types of investments.
- Due diligence involves examining a company's numbers, comparing the numbers over time, and benchmarking them against competitors.
- Due diligence is applied in many other contexts, for example, conducting a background check on a potential employee or reading product reviews.
Understanding Due Diligence
Due diligence became common practice (and a common term) in the United States with the passage of the Securities Act of 1933. With that law, securities dealers and brokers became responsible for fully disclosing material information about the instruments they were selling. Failing to disclose this information to potential investors made dealers and brokers liable for criminal prosecution.
Legal due diligence
Legal due diligence is an essential part of any transaction and a mandatory consideration before entering into any merger or acquisition. It is an exercise in risk assessment to investigate any potential liabilities of the target company that could impact a successful transaction.
Legal due diligence will typically include a careful examination of all material contracts, including partnership agreements, licensing agreements, guarantees, and loan and bank financing agreements.