What Is Due Diligence?
Due diligence is an audit, investigation, or evaluation completed to confirm the proofs of a matter under consideration. In the financial world, due diligence involves an examination of financial records before venturing into a proposed contract with another individual.
Securities dealers and brokers became accountable for fully revealing material information about the instruments they were offering. Failing to disclose this information to prospective investors made dealers and brokers responsible for prosecution.
The Importance of Due Diligence
The due diligence stage is an indispensable element to a successful commercial transaction.
When purchasing a business, the due diligence stage allows the buyer to evaluate the value of the business and to verify the data pertaining to the business to determine whether to advance with the purchase. The due diligence period also allows the buyer to determine if there are any obstacles or risks associated with the transaction. Accordingly, the transaction is usually provisional upon the due diligence stage being concluded.
The due diligence period is usually two weeks to one month in length but can vary depending on the intricacy of the transaction and can also be stretched in some circumstances. Often the buyer and the seller will enter into confidentiality agreements prior to initiating the due diligence so that the seller can be certain that the information the buyer receives, and reviews will be subject to confidentiality constraints. Most of the information for achieving due diligence is obtained immediately from the seller.
Why Due Diligence is crucial:
- The significant value engaged in buying a business both in money and time
- The quality of financial information can vary substantially
- The brevity of material provided in the negotiation stage of the purchase & sale transaction