Due diligence means which of the following

Due diligence is a process where parties to a transaction, as well as their lawyers and accountants, review legal and financial documents relevant to the transaction prior to the finalization of a deal. For example, in the sale of a company, the seller will make pre-signing representations and warranties about the current financial health and contractual relationships of the company in order to arrive at a tentative agreement before revealing confidential information to potential buyers. Due diligence is necessary to confirm that those representations and warranties are correct, or if not, whether a change in the deal terms or termination of the deal is triggered.

Last reviewed: May 3, 2021

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Related Glossary Terms:

• Fiduciary Duties

  A person owes another fiduciary duties when that person has control over a financial interest of the other. For example, corporate directors owe fiduciary duties to that corporation's stockholders.

• Duty of Care

  The duty of care is one of the fiduciary duties and it is violated when an action is taken or not taken on the basis of inadequate information or without following a reasonable process.

• Data Room

  A data room is a space (often virtual) used for storing information such as contracts or corporate documents typically with the intent to share that information in a secure and/or confidential fashion with others (such as with a potential acquiror).

• Exclusivity

  In a term sheet, there is commonly a requirement for temporary exclusivity that requires one or both parties to negotiate exclusively with the other for a limited time or under certain conditions so that the investment of resources and time into due diligence and negotiations intended to finalize the agreement does not get interrupted or wasted because of an interloping offer.

  Here, we look at explaining the due diligence process and what it means across different sectors. For the due diligence meaning in real estate, is different to the due diligence meaning in law as is due diligence in business sectors such as banking and finance. Plus, there are several types of due diligence that we will investigate. While there is a basic due diligence process in theory, there is also contingent due diligence and a process called enhanced due diligence. It is necessary to understand all fully to ensure that you stay within the useful realm of the due diligence process. 

  What is performed due diligence?

  A performed due diligence means that a person or entity has undertaken care and effort in fully understanding another company with which they intend to do business. There are a number of steps that should be followed in the due diligence process.

  Types of performed due diligence

  There are several types of performed due diligence which we investigate below. They vary in terms of what purpose the performed due diligence process is being conducted for. 

  Due diligence meaning in real estate 

  Due diligence in real estate is exceedingly common. In fact, for anyone who has purchased a house or sold a property, they will have been part of a due diligence process, even if it was not called that. It is the process which finds out if there are any issues with the property which the buyer should know before the final purchase. 
  

  Some of these findings could affect a person’s ability to access funding from a bank in terms of a mortgage or loan to purchase the property. The common features that due diligence in real estate will have are:
  

  • looking at the location for any possible risk, 
  • any risk factors to do with the property itself 
  • any environmental concerns. 
    
    

  An example of the due diligence process in real estate would be a survey of a property for a sale by a professional and registered agent. The findings from the survey would then be given to the buyer so that they can make a fully informed decision as to whether to pursue purchasing the property. 

  Due diligence meaning in law 

  Due diligence with regards to law is the process by which a company is obligated to conduct an audit of any future transactions or investments they express a wish to make. Importantly, the companies with which they hope to do business are legally obligated to give them all the information needed to understand all risk factors involved in the transaction. 
  

  An example of due diligence in law would be a Mergers and Acquisitions department of a bank carrying out a thorough investigation of a firm that another firm would like to buy. In this instance, the bank must investigate both entities and it must be fully transparent in all of its findings. 
  

  It is not to be confused with legal due diligence which is the process of investigating a company’s legal health with regards to any outstanding contracts or other legal documents. Legal due diligence can therefore be seen as part of the larger due diligence process. This is because companies will want to read relevant documents or compliance procedures as a means of uncovering any bigger issues. An example of this would be reading through some board meeting minutes or examining how the company has dealt with complying with the GDPR. 

  Due diligence meaning in business

  Due diligence in business is largely viewed as good practice in how to act in all transactional proceedings. While this can definitely include buying whole entities themselves, it also refers to other purchases such as buying software, hardware or any other buoys that require company funds. The hope is to ensure only good purchases take place that meet the needs and requirements of the wider firm. 
  

  An example would be purchasing a new piece of commercial software for a business. To do proper due diligence, an investigation into the pricing of the product is necessary as well as: 

  • reading past customer reviews
  • ascertaining whether the security software will work with current systems 
  • whether any further purchases are required for the software package (subscriptions for instance)

  Contingent due diligence 

  Contingent due diligence is when an entity has confirmed that they are interested in a seller’s offer, but first have to carry out their own investigation into both the offer and the seller themselves. The transaction can go ahead only if the contingent due diligence does not expose any reason for concern. I.e the deal is contingent upon the due diligence’s results. 

  Enhanced due diligence

  Enhanced due diligence is the same as due diligence, only it investigates firms, entities, individuals and offers even more deeply. The idea is to gain even further knowledge to ascertain all risks involved and whether they can be mitigated satisfactorily.

  What is due diligence quizlet?

  Due Diligence. The investigation of the target business, focusing on matters that are material and relevant to the potential buyer's investment decision.

  What is an example of due diligence?

  Due Diligence Examples Conducting thorough inspections on a property before buying it in order to make sure that it is a good investment. An underwriter auditing an issuer's business and operations prior to selling it.

  What does the saying due diligence mean?

  Due diligence has been used since at least the mid-fifteenth century in the literal sense “requisite effort.” Centuries later, the phrase developed a legal meaning, namely, “the care that a reasonable person takes to avoid harm to other persons or their property”; in this sense, it is synonymous with another legal term ...

  What does due diligence include?

  Due diligence is defined as an investigation of a potential investment (such as a stock) or product to confirm all facts. These facts can include such items as reviewing all financial records, past company performance, plus anything else deemed material.